Today's Monday Map touches on a lesser known, but still important, aspect of state tax policy – it shows which states index their income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. for inflation.
Indexation of tax brackets is important for stable taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy – otherwise, as nominal incomes rise, more and more taxpayers end up in higher tax brackets and pay higher rates, even if the real value of their income remains flat. The federal income tax code has had most of its parameters indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. since 1986, yet many states lag behind.
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