Don’t Let High Inflation Hurt Taxpayers Through Bracket Creep
Kansans are currently feeling the effect of high inflation everywhere: the gas pump, the grocery store, favorite restaurants, etc. But one place you may not think about inflation is when it comes to tax brackets. Indeed, the phenomenon of bracket creep due to Kansas’ income tax policies may lead to higher taxes on top of higher prices from inflation.
For context, inflation is the steady increase of prices over time. Inflation has been around 2% annually in recent years, but as America sees inflation move from “transitory” to something-like permanent two culprits emerge – staggering amounts of government spending and ongoing supply chain problems. In the Midwest, consumers have seen a 6.6% increase in the general price of goods since October of last year. This includes a 33.3% jump in higher energy prices, including a 53% increase in the price of gasoline over the past year. It should be noted that energy prices do fluctuate more than other goods but the overall trend is clear.
Because inflation reduces the real value of a wage, a wage’s nominal value increases to counteract this. This leads to the problem of bracket creep as peoples’ wages are increasing on paper. As Milton Friedman said, “Inflation is taxation without legislation.” The way Kansans are taxed based on income causes higher taxes to apply to income normally eaten by inflation.
Let’s say a couple had $50,000 in taxable income last year, they received a 6% increase this year, inflation is 6%, and nothing else changed. The couple would have paid $1,980 in state income tax last year and they would pay $2,138 this year. The difference of $158 is the incremental 5.25% tax rate times the $3,000 pay increase. Inflation offset the couple’s pay increase, and the State of Kansas made it worse with a tax increase.
To avoid quietly pushing tax increases onto its citizens, many states index their brackets for inflation. This includes standard deductions, personal exemptions, and increasing brackets with inflation. Kansas does none of these.
At least, Kansas should consider modernizing – or even simplifying – its bracket system and adjusting it annually based on inflation. The IRS already does this with federal income taxes, so Kansans shouldn’t be left to foot a higher bill because their state government doesn’t adjust as well.
One thought is to what degree bracket creep has influenced Kansas’ large tax surpluses over the past year. High change in month-to-month prices started to pick up in January of this year, so bracket creep could have contributed to the states’ $758 million surplus and the $440 million surplus so far into FY 2022. While the specifics are unclear of how much bracket creep contributed to this, what is true is that adjusting brackets to inflation could help keep more money in the pockets of taxpayers.
Legislators should keep an eye out for Kansans by not turning inflation into even more costs.