(MONEY Magazine) – Taxpayers have good reason to toast the new year. in 1995 they will get more relief from state taxes than at any time in at least a decade. According to Money's annual 50-state tax heaven/tax hell survey (see page 92), only Illinois and the District of Columbia seem highly likely to hike taxes, while more than half the states figure to seriously consider tax cuts. For example, newly elected or sitting governors strongly favor: Phasing out state income taxes altogether in Arizona and Connecticut Slashing state income tax rates by as much as 25% in Iowa, New York and Virginia Shifting two-thirds of local education costs in Wisconsin from property taxes to the state.

Such tantalizing tax treats are the payoff from the November elections, in which Republicans committed to trimming taxes won big across the country. The G.O.P. seized 11 governorships, putting the party in control of 30 statehouses, including those in eight of the nine most populous states. Republicans also gained a net of 481 state legislative seats, giving the G.O.P. a total of 3,508 out of 7,424.

The backlash at the ballot box was fueled in part by more than a decade of steadily rising state and local taxes. Today's median two-income married couple pay 12.4% of their income to state and local governments, up from 11.2% in 1980, according to the Tax Foundation, an independent research organization in Washington, D.C.

Keep a few of those celebratory bottles on ice, though. While foreseeing better times for taxpayers this year, tax experts say the years that follow may be far less buoyant. One reason is the economy. Over the past year, the states collected nearly 1% more in sales, income and corporate tax revenues than they had anticipated, thanks to strong growth driven in part by abnormally high consumer spending. That boost enabled 21 states to trim taxes some $2.7 billion, says Steven D. Gold, director of the Center for the Study of the States in Albany, N.Y. However, with inflation-adjusted incomes stagnant, the savings rate at a five-year low of 4% and consumer debt at an all-time high of 80% of disposable personal income, most experts expect consumer spending to slow. Says Hal Hovey, editor of State Budget & Tax News: "The excellent revenue performance of 1994 was stimulated by unusually high purchases of sales-taxed goods like cars, furniture and electronics. That will be extremely difficult to sustain past 1995."

Another danger is that voters, no matter how much they want lower taxes, will insist that their public services not be reduced. In fact, the typical state has already approved plans to spend 7.5% more for prisons and 7.2% more for Medicaid in 1995 than last year, according to the National Conference of State Legislators. Since red-ink budgets are prohibited in all states but Vermont, higher spending could cause some major headaches. Warns Andrew Klutkowski, the legal editor at Research Institute of America, a tax analysis firm in New York City: "If states reduce taxes and hand the responsibility for services to local governments, cities and towns will have to respond by increasing property taxes."

Consider the example of New Jersey, where Republican Gov. Christine Todd Whitman won office in 1993 largely because she promised to slash state income tax rates by 30% in three years. She has already reduced them by 15%, but her administration balanced its 1994 budget partly by freezing state aid to schools and municipalities. As a consequence, according to the Associated Press, property tax levies across New Jersey rose 5% in 1994, a full percentage point more than in any year since 1990. "The sad reality is that cities and towns are at the end of the food chain," says James McGreevey, a Democratic state senator who also serves as mayor of Woodbridge, N.J.

In addition, states short of revenues are expected to quietly expand taxes on services. Over the past three years, many states have begun taxing everything from fur storage and lawn- care costs in Arkansas to janitorial services and exterminator bills in Ohio. "Manufactured items are a smaller and smaller proportion of the tax base," says Sally Adams, an analyst at CCH Inc., a provider of tax-law information based in Riverwoods, Ill. "So the shift is toward broadening the range of items and activities captured by taxes."

Don't let this cautionary outlook puncture your holiday spirit too quickly, though. Taxes are going down for now, and that's good news. Read on for specific tips on how to keep your taxes low and your spirits high in 1995 and beyond:

Get to know your state's tax code. The IRS estimates that nearly 8 million Americans overpaid their state and local tax bills in 1994 because they didn't realize they were eligible for special breaks. To learn about such goodies, curl up with the instruction booklet for your state tax return. The Hot Zone it's not, but you'll be the richer for spending time with it.

If you're retired and collecting Social Security benefits, for example, they won't be taxed--no matter how high your income--in Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and the District of Columbia. And at least part of a retiree's pension is exempt from taxes in Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Illinois, Louisiana, Maryland, Michigan, Mississippi, Montana, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, South Carolina and Utah.

Couples can soften the marriage penalty by filing separate state tax returns--even if they file jointly at the federal level--in Alabama, Arizona, Arkansas, Delaware, Hawaii, Iowa, Kentucky, Mississippi, Montana, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

In addition, if your children earn money, you might save by filing separately for them too. The federal government will tax investment income above $1,200 earned by any child under 14 at his or her parents' rate. But all states with income taxes, except California and Hawaii, tax kids at their own rate--no matter how much they earn--provided that separate federal and state returns are filed for them.

Be aware that for some states, home is where your job is. If you own dwellings in two states and work part of the time in the state with the higher taxes, watch out. In recent years, California, New York and other high-tax states have begun taxing the entire income of such residents--even interest, dividends and capital gains earned in other states.

What to do? First, find out what constitutes taxable residency in each state where you work or own property. Says Stuart Kessler, a senior tax partner at the accounting firm Goldstein Golub Kessler & Co. in New York City: "There is no hotter issue in the field of state and local taxation right now than establishing domicile." Most states won't consider you a resident unless you spend more than half the year at a home within their borders. But New York and other particularly voracious states may try to tax your entire income if you spend as little as one month within their borders--as long as there's evidence that you were living in your primary home.

What kind of proof can you offer to document that your home in the low-tax state is your main residence? "Keep records that show where you spend most of your time, such as phone and electricity bills," Kessler says. "Also, keep documents that show where you go to church, send your kids to school, register your car and vote."

Shop around for sales tax breaks. Local surtaxes can cause sales taxes to vary widely from one community to another in some states. Californians, for example, pay 8.5% in sales taxes on purchases in San Francisco but only 7.25% in nearby San Rafael. Also, take advantage of sales tax reductions that your state may enact to promote business in depressed areas. For example, New Jersey slashes its 6% sales tax in half for shoppers in Newark. Another break: Car dealers in all states but California, Maryland and Michigan can subtract the value of your trade-in before calculating the sales tax on your new vehicle.

Cut down on consumption of unhealthy items. Over the years, states have regularly ratcheted up excise taxes on products regarded as unhealthy. For instance, in 1994 eight states raised cigarette taxes as much as 50¢ a pack, while six states hiked taxes on alcohol. Since these excise taxes-also known as "sin" taxes-are likely to go up again in 1995, conserving your use of such products can lead to substantial savings. Last year, for example, a pack-a-day smoker in Michigan, home to the nation's highest cigarette tax (75¢ a pack), could have saved $273.75 in taxes alone by kicking the habit.

Invest in tax-free securities. All states but Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming tax unearned income from investments. But interest on Treasuries and other securities issued by federal agencies is exempt from state and local taxes. Chip Norton, managing editor of the Bond Fund Advisor in Ashland, Mass., recommends short-term Treasury notes, available through a broker or directly from the Treasury (call your local Federal Reserve bank or branch for an application). You might also consider municipal bonds, which pay interest that is generally exempt from federal taxes. (For more information on munis, see the federal tax story on page 80 and the Orange County bankruptcy story on page 78.)

Look for breaks on property taxes. If you own a home, all states except Connecticut, Indiana, Massachusetts, New Jersey, Pennsylvania and West Virginia will give you either a tax credit or a deduction on your state taxes for some or all of your property taxes. And you can exempt part of the value of your house from taxation in Alabama, California, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Louisiana, Massachusetts, New Mexico, Oklahoma, Texas and the District of Columbia. Also, a growing number of municipalities cut the property taxes of people age 65 and over, veterans, persons with physical disabilities and heads of low-income households.

Fight property assessments that look wrong. Take a careful look at your local assessor's appraisal of your house. For example, did he erroneously count your attic storage area as a bedroom? Next, compare his estimate with recent sales prices of nearby homes that are similar to yours; you can usually obtain the information from real estate agents or the assessor's office.

If you decide your property was overvalued, ask your local appeals board to correct the assessment. According to David Keating, vice president of the National Taxpayers Union in Washington, D.C., only one in 150 homeowners appeal their assessments, but experts say about 50% of those who do win reductions. If you decide you need professional help, you can hire a consultant, who typically will charge half of your first year's tax savings.

One final tip: It may seem obvious, but this year more than ever, pay attention to the news. Part of the Republican message is that all taxes are on the table. So be on the lookout for any new breaks that might come your way in 1995, courtesy of your new tax-conscious state and local legislators.