Bucco: stealth tax increase in New Jersey must be stopped
The following editorial by Senator Anthony M. Bucco (R-25) on efforts to stop tax increases due to tax bracket drift was published by NJ.com on December 15, 2021:
There is a stealthy increase in income tax that will hit many New Jersey residents next year due to high inflation that many people are unaware of. This is called tax bracket sliding, and it needs to be stopped.
With progressive New Jersey tax rates, workers must pay higher and higher percentages of their income to the state as their income increases. As their income moves into the next tax bracket, they pay more tax on every dollar they earn.
Under this graduated system, a single worker pays a 3.5% income tax rate to the state on income earned between $ 35,000 and $ 40,000. The tax rate increases to 5.525% for income between $ 40,000 and $ 75,000, then to 6.37% for income over $ 75,000.
While it is the state income tax brackets that cover most New Jersey residents, there are higher brackets where workers pay even more. Our maximum rate is now 10.75% for people with incomes over $ 5 million, thanks to the Murphy administration.
In New Jersey, the most common tax brackets most residents face have not changed in decades. While this might sound like a good thing, it’s actually very bad.
This is because inflation continually increases the price of goods and services over time. As a result, workers have to earn more each year just to keep their purchasing power stable.
At this point, the cost of a bag of groceries that was $ 100 in 1996 has dropped to around $ 176 today.
To account for this, many workers receive a cost of living allowance (COLA) in their salary or wages each year – perhaps a 2% or 3% increase in most years – that’s just enough to cover the cost of living. ‘inflation.
If a worker’s gross salary increases due to an annual COLA and that increase pushes their income into the next tax bracket, it no longer stays equal. They are in fact worse off because their purchasing power is diminishing.
The federal government recognizes this and takes into account the impact of inflation on wages by indexing federal tax brackets to the cost of living each year.
Basically, the lower income threshold of each tax bracket increases each year to ensure that workers whose incomes barely keep pace with inflation do not end up paying a higher percentage of their income in taxes.
Unfortunately, New Jersey does not index its tax brackets annually for inflation. As a result, New Jersey residents are subject to tax abuse.
In a real sense, state revenue taxpayers often find themselves poorer from year to year, as their purchasing power declines when inflation and the corresponding COLAs push them into a bracket. higher taxation.
With inflation hitting nearly 7% – the biggest jump in 40 years – it’s likely that many more New Jersey workers will be pushed into higher tax brackets that will force them to hand over an even larger percentage of their wages. revenues to the state.
This is the problem with static tax rates that do not adjust over time for inflation.
When New Jersey’s 6.37% tax bracket came into effect in 1996, it was the highest tax rate in the state. At the time, policy makers considered a person with an income of $ 75,000 to be part of the upper middle class.
Today, after 25 years of inflation, it takes $ 132,000 in income to have the same purchasing power as someone earning $ 75,000 in 1996.
Meanwhile, workers today at $ 75,000 – who are still hit by the 6.37% rate – earn essentially the same wages as those who made just $ 42,600 in 1996.
No one back then would have thought it appropriate to charge these middle class workers such a high rate, and we should not accept it today.
Continued inaction comes at a real cost. For 2022, the non-partisan Office of Legislative Services estimates that automatic tax increases due to bracket creep could cost New Jersey people an additional $ 366 million in taxes, assuming a rate of d inflation of 5%.
To correct this long-standing failure in New Jersey tax policy, I sponsored a law, S-728, which requires all state income tax brackets to be adjusted upward each year based on inflation.
This simple solution would align our state with the federal government and support our efforts to make New Jersey more affordable.
If we are to believe what Governor Murphy said during the election campaign this fall, this proposal should have bipartisan support. After increasing business taxes, payroll taxes, health care taxes, and other taxes over the past four years, the governor has promised that there will be no more tax increases over the course of of his second term.
If he really thinks it, Governor Murphy should back this legislation and stop the stealthy annual tax increases for New Jersey residents that result from bracket creep.
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