Monday Map: Adjustment of State Income Tax Brackets for Inflation

November 25, 2013

An important but often overlooked characteristic of the tax code is whether or not it is indexed for inflation. 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 price increases that result from inflation.

When tax brackets aren’t indexed for inflation, something economists call “bracket creep” can occur. We wrote about this concept back in February:

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. This combined with bracket creep can lead to a higher average tax rate. This is problematic because increased incomes haven’t risen in real terms—only nominally. Indexing addresses this by altering each bracket level each year by the level of annual inflation.

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

Take an individual who earns $40,000. Currently, that person takes a standard deduction of $6,100 and a personal exemption of $3,900, leaving $30,000 as taxable income. After applying the tax table, he would owe $1,744 in state income tax. If the taxpayer then gets a 2 percent raise to keep up with inflation, his income rises to $40,800. Under existing state law, the tax brackets also adjusts with inflation and his state income tax bill will rise only to $1,779 (a 2 percent increase)… [Without inflation indexing], the taxpayer’s state income tax would rise to $1,808 (a 3.6 percent increase).

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

  • Only 12 states fully index brackets to inflation (note that New York's indexing is temporary).
  • California and Oregon partially index their brackets.
  • 19 states (plus D.C.) with multiple brackets do not index at all.

Check out the map below to see where your state lands.

All maps and other graphics may be published and reposted with credit to the Tax Foundation.

Click on the map to enlarge it.

View previous maps here.

Brackets aren’t the only thing that should be indexed to inflation. Standard deductions and personal exemptions should be, too, for the same reason. If your income increases due to inflation (that is, only increases nominally), but the exemption or deduction stays the same, more of your income will be subject to income tax and tax liability will increase, even though you haven’t seen any real increase in purchasing power. (Thus, states on the map that are marked with “single rate tax” could still experience “bracket creep” even though they don’t technically have more than one bracket, since standard deductions and personal exemptions function like a zero percent tax bracket.)

To see which states index their standard deductions and personal exemptions, see this page of our 2014 State Business Tax Climate Index.

See last year’s version of this map here.

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A 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.

Inflation 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.

A 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.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

Inflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in marginal dollars, rather than rates, slowly lose value.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

Bracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation.

The average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes.