By Anthony Bucco | The Save Jersey Blog
I appreciate the interest in legislation I recently introduced regarding annual adjustments in New Jersey’s income tax brackets. I would like to share my thoughts on this important and practical piece of legislation.
As a member of the Assembly Budget Committee, I understand the concerns of some regarding potential loss of revenue that could result by the passage of this legislation. While I understand these concerns, I continue to believe that indexing tax brackets for inflation to promote tax fairness outweighs any negative impact on the budget.
The fact is, the fiscal impact of indexing tax brackets for inflation would be modest. In 1999 the nonpartisan Office of Legislative Services estimated that the percentage revenue loss from indexing income tax brackets would be approximately one-third of the rate of inflation. Last year, the national inflation rate was .7 percent. That means revenue loss would be about .23 percent of income tax revenue.
Using the projected income tax revenue for fiscal 2017, the loss would only be about $33 million. This amount for taxpayer relief pales in comparison to the $240 million in new spending proposed by my colleagues from across the aisle at our last voting session. I am positive that the state can absorb comparatively less revenue in order to benefit all taxpayers. If the state’s finances are in such a precarious position that the state cannot afford this modest correction to assure tax fairness, then the Legislature should not be entertaining legislation that increases spending.
It is important for all New Jerseyans to understand the hidden income tax hikes that they face. The failure to adjust tax brackets for inflation is effectively a tax hike. As wages increase with inflation and tax rates remain the same income tax bills go up. The effect of this hidden tax increase is particularly detrimental to low- and middle-income taxpayers.
To understand the impact of this legislation, one must understand how brackets work. New Jersey’s lowest brackets are very close together for people making $75,000 or less. When tax brackets are very close together bracket creep happens as increased wages push taxpayers into a higher income tax bracket. This can be costly for individuals and families who rely on every dollar they earn.
As a result of New Jersey’s progressive tax brackets, net income actually decreases over time when you factor in the cost of inflation. As a person’s income increases and pushes them into the next tax bracket, their buying power is actually less as a result of inflation all while they are paying more in taxes. This is in addition to the increase in the amount of sales tax paid as the cost of goods increases over time.
To put the problem into perspective, the last time income taxes were cut for New Jerseyans was 1996 under Gov. Christie Whitman. The benefit of that tax cut has been significantly eroded by the effects of inflation because New Jersey does not adjust tax brackets for inflation. If brackets were indexed for inflation back then they would look completely different today. For example, a $35,000 income in 1996, when adjusted for inflation, equates to a $54,398 salary today. If the income tax rate had been adjusted for inflation, the top rate for the taxpayer earning $54,398 would be 1.75 percent rather than 3.5 percent as it is today.
In my opinion, indexing taxes to inflation is vital reform for any tax modernization effort. The federal government has recognized the fairness of inflation indexing since 1981 when President Reagan signed legislation establishing indexing at the federal level beginning in the 1985 tax year. Since that time, 14 of the 34 states with bracketed income tax systems have wholly or partially indexed their tax brackets to inflation, including New York.
The revenue loss from indexing taxes will have a miniscule effect on the state’s budget. In return, taxpayers will be provided with much needed relief without compromising our state’s fiscal integrity. While I clearly recognize that the state’s finances are tenuous and we have many problems to solve, it’s time for the state to provide our taxpayers with a fair and equitable system.