Plan to bust NJ ‘bracket creep’ income tax inflation inches ahead
TRENTON – State lawmakers are considering a bill that would help people avoid paying higher income taxes as their salaries rise along with inflation, pushing them into a higher tax bracket.
It’s a concept called ‘bracket creep’ that critics say acts as a hidden tax hike, applying the state’s progressive tax rates onto taxpayers with increasingly modest incomes.
The state last adjusted most of its tax brackets in 1996, except for changes to the top, marginal rate. At that time now over a quarter-century ago, the tax rate on an individual’s income over $75,000 was set at 6.37%. That threshold hasn’t changed – but $75,000 today is the equivalent of around $41,500 in 1996.
Calculated the other way: If brackets had been adjusted each year to keep up with inflation, the 6.37% bracket would apply at around $135,000 of individual income.
Sen. Anthony Bucco, R-Morris, said the federal government has been adjusting tax brackets for inflation for 40 years, just as a majority of states do.
“A person gets a cost-of-living raise in their salary, and that raise pushes them into the next tax bracket, where they pay more, but yet inflation is giving them less buying power, as we’ve seen most recently when you pull up to the pumps or at the food store,” Bucco said.
“This impact of inflation and the loss of buying power, coupled with paying more in taxes, really sets our residents behind even though they got a raise in their salary,” he said.
For individuals, New Jersey’s tax brackets start at $0, $20,000, $35,000, $40,000, $75,000, $500,000 and $5 million, with the rate starting at 1.4% and reaching 10.75%. For married couples, the brackets start at $0, $20,000, $50,000, $70,000, $80,000, $150,000, $500,000 and $5 million.
“By giving them this small break, it will give them some hope, especially those in the lower- and middle-income tax brackets that get hit the hardest,” Bucco said.
Christopher Emigholz, vice president of government relations for the New Jersey Business and Industry Association, said the biggest help would be for middle-income taxpayers – families whose tax rates jump from 1.75% on income under $50,000 to 2.45%, 3.5% and then 5.525% on income over $80,000.
“A lot of times when you look at tax policy, you see that there are tax policies that the left-leaning advocates like and tax policies that right-leaning advocates like. Interestingly, here you see a tax policy that is supported by both left and right,” Emigholz said.
But the bill, S676, has some skeptics, including three Democrats who voted to abstain when the Senate Budget and Appropriations Committee endorsed it recently.
And its prospects remain unclear. The Senate held two voting sessions after it was released from the committee but didn’t take up the bill. The Assembly version of the bill – which unlike the Senate one includes no Democratic co-sponsors – has not gotten a hearing.
Nonpartisan fiscal analysts estimate that the bill could cost the state $150 million to $440 million once it’s fully in effect, then compounding annually with inflation. Revenue from the income tax goes toward property tax relief, so Sen. Teresa Ruiz, D-Essex, said people could just wind up paying more if schools and towns receive less aid for their budgets.
“Even though that household may be getting $100 extra for the year, then the municipality and/or the school district has to raise their tax levy and then that gets passed on to them again,” Ruiz said.
“Like with many things, sometimes it looks really good but when you look close, it’s not as good as it appears to look,” said Sen. Sandra Cunningham, D-Hudson.
Sheila Reynertson, a senior policy analyst at New Jersey Policy Perspective, said that while it’s true that without indexing that a greater share of income becomes subject to higher tax rates, the change carries “an enormous price tag that would only grow over time.”
She said the change could amount to a “very small tax cut for everyday families” that winds up slashing aid to schools and municipalities, leading to layoffs, brutal cuts or higher property taxes, fines and fees.
“We may have a substantial budget surplus now, but it is temporary given that the infusion of the federal funds are going to expire soon. To assume that economic growth will make up those differences, wishful thinking,” Reynertson said.
Reynertson said the state could limit the impact on its revenues by not adjusting the top bracket, like California and Oregon. She said it could also index for inflation the personal exemption and standard deduction, which similarly decline in value and are of particular benefit to lower-income residents.