(MONEY Magazine) – | At long last, the voice of the taxpayer has been heard in state capitols all across the country. ''Voters are in a bad mood, and state officials are reluctant to risk their wrath by raising taxes,'' says Steven D. Gold, director of the Center for the Study of the States in Albany, N.Y.New Jersey Governor-elect Christie Whitman even won in November at least partly on a promise to cut income taxes by 30% over three years. Indeed, our 50-state forecast for state tax increases in 1994 and 1995 (page 84) shows only Michigan, Vermont and the District of Columbia as all but certain to hike taxes in the next two years. And, even then, the net effect of Michigan's anticipated tax increase may be a wash for many residents; it may merely replace the $6 billion in school-related property taxes that the state legislature abolished last year. In general, for fiscal '94, state legislatures have enacted just $4.1 billion in new taxes -- a fourth the size of the giant $16.2 billion tax blitz of 1992. But this trend won't last. Here's why: -- The 1993 tax law's cutbacks in federal deductions mean higher state taxes. That's because states typically require residents to compute their state income taxes based on their federal return. Since, for example, you can claim only 50% of unreimbursed business travel and entertainment expenses -- vs. 80% before the new law -- your federal and state income tax bills could well be higher than they would otherwise be. ''This is really a new kind of hidden state tax,'' says Tom Sherman, a Minneapolis tax partner with the accounting firm Coopers & Lybrand. Rhode Island, however, reduced its top state income tax rates in 1993 to offset the federal increases for a year. -- Property tax increases are accelerating, partly because local governments have lost more than $1 billion in state and federal funds since 1991. ''State austerity measures have put pressure on local governments, which have responded by increasing property taxes,'' says Hal Hovey, editor of State Budget & Tax News, a newsletter in Columbus, Ohio. For the second quarter of 1993, total U.S. property taxes rose 5.7% from the same period in 1992, vs. a 4.6% rise in state income taxes. What's more, problems such as soaring education and health-care expenditures persist at the state level. Thus the states are unlikely to continue their moderation throughout the 1990s. To counteract looming state and property taxes, first familiarize yourself with the unique rules governing your state and local tax codes. Buried in the ; instruction booklet for your state tax return is a trove of tips designed to reduce both your income and property taxes. One small comfort: If you itemize on your federal tax return, you are allowed to deduct on your 1040 form your state income and property taxes, which is especially helpful for residents of places like Wisconsin and New York where the state income tax rate is steep.

For specific tax-cutting moves, follow these six strategies: -- Seek out all broad-based state tax breaks. For instance, taxpayers in nine states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, Oklahoma, Oregon and Utah) can write off at least some of their federal income tax on their state returns. Also, if your health-care bills are high, keep in mind that four states -- Alabama, Arizona, New Jersey and Wisconsin -- let you deduct a larger share of your medical bills than the expenses exceeding 7.5% of adjustable gross income that you can deduct on your federal 1040. -- Dig, dig, dig for special allowances. Certain groups of taxpayers can reap more state benefits than others -- if they know to take them. Married working couples should consider filing separate state returns, for example. If you earn substantially more than your spouse, the effective state income tax rate you'll pay by filing jointly may be higher than if you file separately. The District of Columbia and these 13 states let married couples file separately even if they will file joint federal returns: Alabama, Arizona, Arkansas, Delaware, Hawaii, Iowa, Kentucky, Mississippi, Montana, Pennsylvania, Tennessee, Virginia and West Virginia. ''Try working out your state taxes both ways, and see if you come out better filing separately or jointly,'' says Andrew Klutkowski, legal editor at Research Institute of America, a tax publisher in Englewood Cliffs, N.J. Most parents should file separate state returns for their children. Under the so-called kiddie-tax rules, if your child is under 14, any investment income above $1,200 a year would be taxed by Uncle Sam at your higher rate. All states except California and Hawaii, however, blessedly tax your kids at their rates regardless of their income, as long you file separate returns for them. To take advantage of this deal, you must also file separate federal returns for each of your children. ''It's a little extra paperwork, but it might be worth the effort,'' says Jeffrey Gotlinger, a partner at Ernst & Young in New York City. For example, if you live in New York State and your daughter's investment income is $4,500, you could save about $200 on your state return by filing separately for her. Under another special break, retirees don't have to pay state income taxes on Social Security benefits in the following 26 states: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania and Virginia. That's welcome news, especially this year when as much as 85% of the benefits will be taxed by Uncle Sam, up from 50% in 1993.

-- Furthermore, any type of pension is exempt from taxation in Hawaii, Illinois and Pennsylvania. Private pension benefits are partially deductible if you live in one of the following 17 states: Alabama, Arkansas, Colorado, Delaware, Georgia, Louisiana, Maryland, Michigan, Mississippi, Montana, New Jersey, New Mexico, New York, North Carolina, Oregon, South Carolina and Utah. -- If you live in D.C. or one of the 43 states with its own income tax on unearned income, consider investing in Treasuries. That's because interest from Treasury bills, notes and bonds is exempt from state and local tax. But U.S. Government bond funds such as Vanguard Intermediate Term U.S. Treasury Portfolio (5.30% yield; 800-851-4999) and Strong Government Securities (5.57% yield; 800-368-1030), despite their names, will not be 100% exempt from state taxes since they are not fully invested in Treasuries. What's more, six states (California, Connecticut, New Jersey, New York, Pennsylvania and Vermont) have special guidelines that limit your ability to exclude Treasury interest from funds. If you live in one of these states, before investing in a fund, call it -- or ask your broker -- for your own state's precise rules, as well as the percentage of the fund's holdings and income that are derived from Treasuries. -- If you're in the 28% tax bracket or above and live in a state with a steep income tax, look into munis issued in your home state. They can be a triple- tax boon: The interest they pay is exempt from all federal, state and local taxes. Jim Lynch, editor of the Lynch Municipal Bond Advisory newsletter, says investors should currently shun munis maturing beyond 15 years, since rates are likely to rise by as much as half a percentage point this year. The additional one-quarter of 1% or so in yield that you would get for choosing a bond with a longer maturity is not worth the added potential risk of principal loss, he says. If you don't have the $25,000 to $50,000 needed to properly diversify among five munis, shop for a mutual fund that invests only in tax-exempt bonds issued by your state. For instance, Dreyfus New York Tax-Exempt Intermediate Bond Fund (800-645-6561), which holds bonds with an average maturity of 9.7 years, currently yields 4.29%; that is equivalent to 6.79% from a taxable investment if you are in the 28% federal bracket and you live in New York City. -- Homeowners should grab all available property tax breaks. Every state except Connecticut, Indiana, Massachusetts, New Jersey, Pennsylvania and West Virginia lets homeowners deduct or get a credit for at least some of their property taxes on their state income tax returns. In the following 18 states (and Washington, D.C.) you can avoid even owing taxes on a certain dollar amount of your home's value: Alabama, California, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Massachusetts, Minnesota, Mississippi, New Mexico, Oklahoma, Texas, Wisconsin and Wyoming. Among the most generous: Florida, which offers a maximum $25,000 exemption, and Hawaii, where exemptions run from $40,000 to $120,000, depending on the county and your age. Many states also offer property tax breaks for individuals with physical disabilities, veterans and senior citizens. -- If you think there's even a remote chance that your property tax bill is wrong, appeal your assessment. More than half of the people who challenge their assessments succeed in reducing them, according to Gene Baroni, national director of multistate tax services for Coopers & Lybrand. Average reduction: about 10%. Say you live in Pittsburgh, where property taxes are a steep 2.47% of fair market value. If your $200,000 home's assessed value is reduced by 8%, you would save $395 a year. What's more, an appeal comes with little downside risk. ''It's rare that an appeals board would increase your taxes after you protest, so you have nothing to lose,'' says Ed Salzman, author of Appeal Your Property Taxes and Win (Panoply Press, $9.95). The most successful appeals show that your home's assessment is too high compared with similar properties, says David Keating, executive vice president of the National Taxpayers Union in Washington, D.C. By combing through lists of recent sales in your local assessor's office, you can find out what comparable homes in your area have sold for in the past six months. Lowering your assessment today can pay off in reduced property taxes for years to come. It also sends the message that the voice of the taxpayer can be accompanied by action.