Incomes often rise at the pace of cost-of-living increases, but New Jersey’s income tax fails to take inflation into account. As a result, state income taxes grow faster than incomes without any vote on a tax hike, forcing people into higher brackets.
It is important for New Jerseyans to know the hidden tax hikes they face. Tax brackets that are not adjusted for inflation cut into your income just as effectively as a tax hike; as wages increase with inflation, tax rates remain the same and tax bills go up. This is especially true for the low- and middle-income taxpayer.
Lack Of Indexing Hurts The Lower- And Middle-Class. New Jersey’s lowest brackets are very close together for people making $75,000 or less. This results in “bracket creep.” Bracket creep occurs as wages increase with inflation, forcing taxpayers into a higher bracket. This can be costly for individuals and families who rely on every dollar they earn.
• Individual income tax brackets top out at a 1.4 percent rate up to $20,000; 1.75 percent up to $35,000; 3.5 percent up to $40,000; and 5.525 percent up to $75,000.
Even the smallest income increase can add to the tax burden. For example, a person earning $30,000 per year with two-percent yearly inflation over a decade will see his salary increase to $36,570. In that decade taxes will have increased 31 percent on that person, even though income only increased 22 percent to adjust for inflation. Inflation adjusted, net income decreased 5.5 percent. This does not include the increased prices of goods over that period – meaning the cost of goods increased as income decreased. Non-indexed income taxes are effectively an un-enacted tax hike on low- and middle-income earners.
Revenue Is Not A Problem, Spending Is. Indexing income taxes to inflation would result in only a $20 million to $40 million revenue loss at the time of enactment, and at most $80 million in future years at 2 percent inflation – only .2 percent of total revenue – according to the non-partisan Office of Legislative Services. For comparison, Democrats have passed $240 million in new spending in one day.
Indexing Is Vital To Any Tax Modernization Effort. Since the federal government began inflation indexing in 1986, it has become more prominent in state income tax modernizations. Of the 34 states with bracketed income tax systems, 14 wholly or partially index their tax brackets to inflation, including New York.
Taxpayers Have Been Waiting Too Long. To put the problem into perspective, the last time income taxes were cut for New Jerseyans was 1996 under Governor Christine Todd Whitman. If brackets were indexed for inflation back then, they would look completely different today. The math is simple: $20,000 in 1996 is equal to $30,765 today; $35,000 back then is worth $53,839 now. Further, $50,000 and $75,000 in 1996 are worth $76,913 and $115,369 today. The low- and middle-income taxpayers will benefit the most if taxes are indexed to inflation. It’s time to enact tax fairness and protect New Jersey taxpayers.