Friday, June 21, 2024
Hawai'i Free Press

Current Articles | Archives

Tuesday, December 8, 2015
Does Your State Adjust Its Income Tax Brackets For Inflation?
By NCPA @ 12:01 AM :: 4975 Views :: Hawaii Statistics, Taxes

Does Your State Adjust Its Income Tax Brackets For Inflation?

by Scott Drenkard, The Tax Foundation, December 2, 2015

One important, common-sense taxpayer protection built into the federal income tax code is inflation indexing. Inflation indexing means that tax brackets (and other important dollar-amount features of the individual income tax, like standard deductions or personal exemptions) are revised annually to reflect nominal price and wage increases that result from inflation. Thanks in part to my colleague Steve Entin, the federal income tax code has been inflation-indexed since the 1980s. However, states vary with regard to how well they adjust their income tax brackets, as you can see in the map below:

When tax brackets aren’t indexed for inflation, it results in what economists call “bracket creep.” Higher income can bump a taxpayer into the next tax bracket, even if that higher income is merely keeping pace with inflation. A lack of inflation adjustment can also push more of a taxpayer’s income into the highest bracket for which they qualify. The final result is a tax increase that occurs without any legislation being passed. Indexing addresses this by altering each bracket level each year by the level of annual inflation.

Here’s an example under Virginia’s individual income tax:

Take a single individual who earns $40,000. Currently, that person takes a standard deduction of $3,000 and a personal exemption of $930, leaving $36,070 as taxable income. After applying the tax table, he would owe $1,816 in state income tax. If the taxpayer gets a 2 percent raise next year because of inflation, his income rises to $40,800 and his tax bill rises to $1,863. Because Virginia doesn’t index its tax brackets, its standard deduction, or its personal exemption, this tax bill is a 2.53 percent increase over the previous year. An inflation-indexed code would only raise his income tax liability by 2 percent—which is not a hike at all in real terms.

Which states include this important tax policy feature in their tax codes? Surprisingly, not enough of them:

Only 24 states fully index brackets to inflation (this includes the nine states with single-rate income taxes, which are by definition inflation-indexed)

California and Oregon partially index their brackets.

17 states (including Hawaii) plus D.C. with multiple brackets do not index at all.

Also important, but not pictured in the map are details about which states inflation-index their standard deductions and personal exemptions. For a list of these, see page 73 of our 2016 State Business Tax Climate Index.

---30---

 

Links

TEXT "follow HawaiiFreePress" to 40404

Register to Vote

2aHawaii

Aloha Pregnancy Care Center

AntiPlanner

Antonio Gramsci Reading List

A Place for Women in Waipio

Ballotpedia Hawaii

Broken Trust

Build More Hawaiian Homes Working Group

Christian Homeschoolers of Hawaii

Cliff Slater's Second Opinion

DVids Hawaii

FIRE

Fix Oahu!

Frontline: The Fixers

Genetic Literacy Project

Grassroot Institute

Habele.org

Hawaii Aquarium Fish Report

Hawaii Aviation Preservation Society

Hawaii Catholic TV

Hawaii Christian Coalition

Hawaii Cigar Association

Hawaii ConCon Info

Hawaii Debt Clock

Hawaii Defense Foundation

Hawaii Family Forum

Hawaii Farmers and Ranchers United

Hawaii Farmer's Daughter

Hawaii Federation of Republican Women

Hawaii History Blog

Hawaii Jihadi Trial

Hawaii Legal News

Hawaii Legal Short-Term Rental Alliance

Hawaii Matters

Hawaii Military History

Hawaii's Partnership for Appropriate & Compassionate Care

Hawaii Public Charter School Network

Hawaii Rifle Association

Hawaii Shippers Council

Hawaii Together

HiFiCo

Hiram Fong Papers

Homeschool Legal Defense Hawaii

Honolulu Navy League

Honolulu Traffic

House Minority Blog

Imua TMT

Inouye-Kwock, NYT 1992

Inside the Nature Conservancy

Inverse Condemnation

July 4 in Hawaii

Land and Power in Hawaii

Lessons in Firearm Education

Lingle Years

Managed Care Matters -- Hawaii

MentalIllnessPolicy.org

Missile Defense Advocacy

MIS Veterans Hawaii

NAMI Hawaii

Natatorium.org

National Parents Org Hawaii

NFIB Hawaii News

NRA-ILA Hawaii

Obookiah

OHA Lies

Opt Out Today

Patients Rights Council Hawaii

Practical Policy Institute of Hawaii

Pritchett Cartoons

Pro-GMO Hawaii

RailRipoff.com

Rental by Owner Awareness Assn

Research Institute for Hawaii USA

Rick Hamada Show

RJ Rummel

School Choice in Hawaii

SenatorFong.com

Talking Tax

Tax Foundation of Hawaii

The Real Hanabusa

Time Out Honolulu

Trustee Akina KWO Columns

Waagey.org

West Maui Taxpayers Association

What Natalie Thinks

Whole Life Hawaii