Ta圎DU combines the best aspects of cutting-edge and traditional educational platforms to elevate the debate, enable deeper understanding, and achieve better, more principled tax policy. Tax Foundation’s Ta圎DU was launched to address the growing lack of tax literacy in our classrooms, living rooms, and government chambers. Our experts are continuously analyzing the day’s most relevant tax policy topics and are relied upon routinely for presentations, testimony, and media appearances on tax issues spanning every level of government. (b) New Hampshire and Tennessee tax interest and dividend income only.Our Center for Federal Tax Policy, Center for State Tax Policy, and Center for Global Tax Policy each produce timely and high-quality research and analysis that influences the debate toward economically principled tax policies. (a) California and Oregon do not fully index their top brackets. State Indexation of Major Features of the Individual Income Tax State Ideally, mechanisms should be consistent within a state, and should be simple and easily replicable, with fair rounding conventions that do not invariably favor the government over the taxpayer. Methods differ not only state-to-state, but even provision-to-provision within a given state. Some use fiscal years, others calendar years, and others their own state-defined periods, while many follow the federal convention of a 12-month period running from September to August. Some states make cumulative adjustments from a base year, while others upwardly revise the figures from the prior year’s brackets. States use different measures of inflation, different equations for their calculations, different rounding conventions, and even different dates for calculating a given year’s inflation adjustment. This means the tax code changes without a vote being taken, which creates a lack of political accountability. Without changes to state tax provisions, inflation increases state income tax collections significantly faster than the real growth of state income, or erodes excise tax collections as inflation reduces the value of a volume-based levy expressed in dollar terms. Without indexing, inflation can distort tax liability because inflation changes do not affect all taxpayers equally and are not in line with legislative intentions. Indexing has important implications for tax equity, political accountability, and the rate of growth of government revenues. With excise taxes, indexing is generally intended to benefit the government, taking volume-based levies like a motor fuel tax and adjusting them to maintain their value in real terms. Within the individual income tax, brackets, standard deductions, personal exemptions, and other features can all be indexed to avoid the imposition of a hidden inflation tax, which occurs when a greater share of a taxpayer’s income is taxed even if their real income has not increased. Motor fuel taxes are a good example as they are typically levied in terms of cents per gallon. Absent these adjustments, income taxes are subject to “ bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in marginal dollars, rather than rates, slowly lose value.Īny tax provision tied to a specific dollar amount can potentially be inflation-adjusted. Inflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation.
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