Bracket creep could return to state income taxes
Bracket creep was one of the more destructive offshoots of the high inflation 1970s. As people’s wages rose to keep pace with rising prices, they would find themselves in higher income tax brackets. It wasn’t because they were suddenly rich, but because the brackets or state deductions were not indexed to inflation.
The Tax Foundation notes that bracket creep could rear its ugly head again:
Forty-one states and the District of Columbia tax wage income, while New Hampshire taxes just income and dividend income. Of these, 15 states and D.C. fail to adjust brackets for inflation, 10 states leave their standard deduction (if they have one) unadjusted, and 18 have an unindexed personal exemption. Taken together, 22 states and the District of Columbia have at least one major unindexed provision. Thirteen states fail to index any relevant major component. (In some cases, they may forgo a standard deduction or personal exemption, but all relevant provisions are unindexed.) They are Alabama, Connecticut, Delaware, Georgia, Hawaii, Kansas, Louisiana, Mississippi, New Jersey, New York, Oklahoma, Virginia, and West Virginia.
The absence or insufficiency of cost-of-living adjustments in many state tax codes is always an issue, as it constitutes an unlegislated tax increase every year, cutting into wage growth and reducing return on investment. During a period of higher inflation, however, the impact is particularly significant.
Politicians like hidden taxes like bracket creep because they never have to vote on them – inflation does all the heavy lifting. That’s a scam of the first order. And not surprisingly, both major political parties are in on the heist.