Bucco: New Jersey’s Stealth Tax Increase Must Be Stopped

The following editorial by Senator Anthony M. Bucco (R-25) on efforts to stop tax increases due to tax bracket creep was published by NJ.com on December 15, 2021:

There’s a stealth income tax increase that will hit many New Jerseyans next year as a result of high inflation that many people don’t know about. It’s called tax bracket creep, and it needs to be stopped.

With New Jersey’s progressive tax rates, workers have to pay increasingly higher percentages of their income to the state as their earnings rise. As their income enters the next tax bracket, they pay more in taxes on each 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 jumps to 5.525% for income between $40,000 and $75,000, and then to 6.37% for income above $75,000.

While those are the state income tax brackets that cover most New Jerseyans, there are higher brackets where workers pay even more. Our top rate is now 10.75% for those with incomes over $5 million, courtesy of the Murphy administration.

In New Jersey, the most common tax brackets that most residents are subject to haven’t been changed in decades. While that might seem to be a good thing, it’s actually very bad.

That’s because inflation continually increases the price of goods and services over time. As a result, workers need to earn more each and every year just to maintain their purchasing power at a stable level.

To that point, the cost of a bag of groceries that was $100 in 1996 has risen to about $176 today.

To account for this, many workers receive a cost-of-living allowance (COLA) in their wage or salary each year — maybe a 2% or 3% bump in most years — that’s just enough to cover inflation.

If a worker’s gross wages rise due to an annual COLA and that raise pushes their income into the next tax bracket, they’re no longer staying even. They are actually worse off because their purchasing power decreases.

The federal government recognizes this and accounts for 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 rises each year to ensure that workers whose earnings are just keeping up with inflation don’t end up paying a higher percentage of their income in taxes.

Sadly, New Jersey doesn’t index its tax brackets annually for inflation. As a result, New Jerseyans are subject to tax bracket creep.

In a real sense, state income taxpayers often find themselves poorer from one year to the next since their purchasing power decreases when inflation and matching COLAs lift them into a higher tax bracket.

With inflation surging at close to 7% — the biggest jump in 40 years — it’s likely that many more New Jersey workers will be pushed into higher tax brackets that force them to hand over an even larger percentage of their income to the State.

That’s the problem with static tax rates that aren’t adjusted over time for inflation.

When New Jersey’s 6.37% tax bracket took effect in 1996, it was the state’s highest tax rate. At the time, policymakers considered a person with $75,000 in income to be upper-middle class.

Today, after 25 years of inflation, it takes $132,000 in income to have the same purchasing power as a person earning $75,000 in 1996.

Meanwhile, today’s $75,000 workers — who still are hit with the 6.37% rate — are essentially earning the same as those who earned just $42,600 back in 1996.

Nobody back then would have thought it appropriate to charge those middle-class workers such a high rate, and we shouldn’t accept it today.

There’s a real cost to continued inaction. For 2022, the nonpartisan Office of Legislative Services estimates that automatic tax increases due to tax bracket creep could cost New Jerseyans an extra $366 million in taxes, assuming a 5% rate of inflation.

To fix this long-standing failure in New Jersey tax policy, I’ve sponsored legislation, S-728, that requires all state income tax brackets to be adjusted upwards each year for 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 on the campaign trail this fall, this proposal should have bipartisan support. After raising business taxes, payroll taxes, health care taxes, and other taxes over the past four years, the governor promised there would be no more tax increases in his second term.

If he really means it, Governor Murphy should support this legislation and stop the annual stealth tax increases on New Jerseyans that result from tax bracket creep.