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Inflation Quietly Raises Middle Class Tax Bills Through ‘Bracket Creep’

While inflation is driving up the cost of living, it’s also quietly putting Americans on their taxes.

The average New Yorker earning about $80,000 a year will be forced to shell out an additional $225 in taxes during tax season this year and next, according to analysis prepared for The Post by the Tax Foundation became.

That’s because the federal government and a group of 13 states, including New York, New Jersey and Connecticut, have not fully adjusted their tax brackets for inflation, even as the cost of everything from groceries to gasoline continues to rise across the country and reach 8.5%. increase in March.

For the calculations, the Washington-based think tank used the example of an employee who had taxable income of $80,650 in 2020. Assuming her paycheck receives a cost-of-living hike to keep up with inflation, her state taxes will increase by a total of $132 by the end of 2022, with the Internal Revenue Service’s federal bill increasing by $93, according to the group US dollar has increased.

“Taxpayers have every right to be frustrated,” Jared Walczak, vice president of government projects at the Tax Foundation, told The Post. “Most states are generating record tax revenues.”

money
The price of consumer goods has risen 7.9% over the past 12 months – the highest rate of inflation since 1982.
Getty Images

“Bracket creep” — CPA lingo for when taxpayers are pushed into higher brackets because governments don’t index their income to account for inflation, increasing the percentage of total income they pay in taxes — is for the first time has been a talking point for decades, policy pundits told The Post.

“It’s like the Kellogg commercial from the 1980s — try it again for the first time,” says James Lucier, chief executive of Capital Alpha, a Washington-based policy research firm. “People wake up and discover they have their parents’ tax problems.”

After the double-digit inflation of the 1970s and 1980s, Congress sought to take federal action to stop the creep of the brackets by adjusting the brackets for inflation. Without such adjustments, the cost of inflation to federal taxpayers this year would be closer to $1,000, according to Walczak.

fuel prices
The cost of living has skyrocketed as inflation eats away real wages and gas prices hit all-time highs.
Christopher Sadowski for the NY Post

Still, it takes at least a year for the IRS to adjust the brackets to reflect new levels of inflation. With inflation skyrocketing from about 2% last year to over 8% this spring, that lag is putting people under short-term pressure, according to the Tax Foundation.

However, some taxpayers may be hardest hit at the state level, according to policy experts. In New Jersey and Connecticut, Republican legislators introduced a bill that would address the tax bracket by accounting for inflation in the tax brackets. The draft has yet to be voted on.

Last week, in the state’s annual budget, New York lawmakers proposed suspending the state’s gasoline tax for the final six months of the year. Tax experts say such one-off steps don’t come close to matching the benefits taxpayers would get if the brackets were adjusted for inflation.

Jerome Powell
Fed Chair Jerome Powell plans to hike interest rates in the coming months.
REUTERS

New York State Senator and senior member of the GOP committee Tom O’Mara said he’s pushing to make that happen in the next budget and expected preventing further “stealth tax” increases “to New Yorkers annually could save about $300 million.”

In some states, failure to adjust for inflation has resulted in almost comical tax tables. In Alabama, the upper limit is $3,000 — a figure introduced in the depths of the Great Depression in 1935, when $3,000 was equal to $62,000. According to Walczak, there are six states where the top tax bracket is under $10,000 and hasn’t been updated in decades.

“Bracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep leads to an increase in income taxes without an increase in real income. Many tax rules – both federal and state – are adjusted for inflation.”

tax foundation

“It’s mainly low earners who are burdened,” adds Charles Myers, chairman and founder of the management consultancy Signum Global Advisors. “Wage gains are diluted by the higher cost of living and higher taxes…sometimes families fall behind despite wage increases.”

Paul Volcker
“Former Fed Chairman Paul Volcker raised interest rates in the 1970s and 1980s to bring the Fed rate in line with inflation, and that’s how he crushed inflation,” said James Lucier, managing director at Capital Alpha.
AFP via Getty Images

While some states are trying to change tax laws to address tax bracket creep, at least some policy observers are skeptical that policy will change soon enough to address the immediate costs of rising inflation.

“Former Fed Chairman Paul Volcker raised interest rates in the 1970s and 1980s to bring the Fed rate in line with the rate of inflation, and in doing so he crushed inflation.

Anthony Bucco, a New Jersey state senator, introduced legislation in 2012 to index Garden State tax brackets for inflation.

“Why we’re punishing taxpayers is beyond me,” Bucco said.

https://nypost.com/2022/04/14/inflation-is-quietly-raising-middle-class-tax-bills-through-bracket-creep/ Inflation Quietly Raises Middle Class Tax Bills Through ‘Bracket Creep’

DUSTIN JONES

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