The millions of Americans could be in store for higher as inflation pushes consumer prices higher.
The phenomenon, known as bracket creep, results when taxpayers are pushed into higher-income brackets even though their purchasing power is essentially unchanged due to steeper prices for everyday goods.
When drawing the brackets for taxes on wage and income, a recent analysis by the Tax Foundation shows that 15 states don't account for inflation when the IRS adjusts federal income taxes for inflation. Another 18 states don't index personal exemption tax to inflation.
The 22 states have at least one major unindexed provision, which could mean higher taxes for millions of taxpayers amid a monthlong inflation spike that has shown no sign of slowing down.
When tax brackets, the personal exemptions or standard deduction are not adjusted for inflation, that money loses value due to the higher price that consumers pay for things like food, rent and gasoline, said Jared Walczak, the vice president of state projects.
Walczak said that bracket creep occurs when more of a person's income is in higher tax brackets because of inflation rather than higher real earnings.
There's no automatic cost-of- living adjustment built into the tax provision in order to keep pace with inflation, which makes it possible for residents living in states where taxes are not indexed to inflation. For instance, a hypothetical Delaware resident who earned $60,000 in taxable income in 2019 and now makes $64,000 has not actually seen an increase in real income; the $64,000 she earns today has about the same purchasing power as the $60,000 she made in 2019, Walczak wrote.
Because her state's income tax brackets are not indexed to inflation, that higher salary pushes her into a higher property tax rate 6.6% whereas before she was paying a rate of 5.5%. While the resident's purchasing power is unchanged, her tax bill increases by $264.
The absence or insufficiency of cost-of - living adjustments in many state tax codes is always an issue, as it constitutes an unlegislated tax increase every year, cutting into wage growth and reducing return on investment, Walczak wrote. The impact is particularly significant during a period of higher inflation. The government released new data this week that stated that prices for U.S. consumers increased by 6.2% in October compared to a year earlier. The core price, which exclude the more volatile measurements of energy and food, rose 4.6% over the past year. Both are the largest increase in 30 years.
Rising inflation is eating away at strong gains and wages and salaries that American workers have seen in recent months, compared to October 2020, when accounting for inflation Economists think the spike will last well in 2022, as inflation metrics will remain quite high for much of next year until global supply chain bottlenecks clear up.
The inflation overshooting will likely get worse before it gets better, according to the Goldman economists.