BY JOHN REITMEYER
NJ Spotlight
State lawmakers haven’t voted to raise individual income taxes this year, but many New Jersey residents could still be facing under-the-radar hikes as they’re getting walloped by inflation.
These hidden tax increases, by some estimates, could be costing taxpayers hundreds of millions of dollars annually.
The root cause is something tax experts call bracket creep. It can occur when the general cost of goods and services goes up at a higher rate than any growth in individual wages. And that’s happening right now, according to the latest federal data.
Unless tax brackets are regularly adjusted to account for inflation, a person’s income could be taxed at a higher rate by the government. As a result, they end up having to pay more in taxes, even if rising prices are consuming their growing wages, meaning they are likely losing ground financially. That’s atop New Jerseyans’ other great burden: the nation’s highest property taxes, averaging a record-high $10,570 last year for an almost 5% increase from 2024.
‘No approval’
The federal government and many states adjust, or index, their income tax brackets to inflation on an annual basis to prevent this from occurring. New Jersey, though, remains among the states that do not have an indexing policy, meaning its residents remain susceptible to getting hit with what many call stealth tax hikes due to bracket creep.
“Every year, the tax goes up on residents, but there’s no record of voting, there’s no approval of this tax increase,” said Janelle Fritts, senior policy analyst at the Tax Foundation, a nonpartisan organization based in Washington, D.C.
“It’s just something that’s baked into the tax code that people might not even realize has happened,” said Fritts, who is an expert in state tax policy.
Inflation has been a key concern for many residents following the federal government’s robust response to the COVID-19 pandemic. The inflation rate slowed on the eve of President Donald Trump’s second term, then hit a three-year high this year amid Trump’s ongoing war in Iran.
As of last month, the rate of annual inflation on all consumer items was 3.4%, according to the federal Bureau of Labor Statistics. That expansion soared above a 2% Federal Reserve benchmark, and also outpaced annual growth in individual earnings, which totaled 3.2% in July, the BLS found.
New Jersey, like the federal government, levies income taxes using a graduated scale of rates that generally requires those with higher incomes to pay higher rates than those with lower incomes.
Unlike New Jersey’s hourly minimum wage, which is indexed to inflation, individual income tax brackets are not subject to any annual adjustments.
Working class
The effects of bracket creep on individual New Jersey taxpayers can vary, and depend on factors including annual taxable income and how close they are to entering a new bracket. The collective hit could total $150 million to $440 million annually, depending on the inflation rate, according to a 2022 estimate by New Jersey’s nonpartisan Office of Legislative Services.
Amid the latest uptick in inflation, affordability has remained a Trenton buzzword, and state policymakers have enacted a number of measures designed to help ease he rising cost of living.
These include a temporary expansion of New Jersey’s child tax credit enacted this year by Gov. Mikie Sherrill, a first-term Democrat, and a state budget signed into law by Sherrill that did not rely on any revenue from increased taxes on individuals.
Senate Minority Leader Anthony Bucco (R-Morris) is urging policymakers to go further.
“Gov. Sherrill proclaims there were no tax increases this year, but we know bracket creep is one of the biggest tax increases there is, and every working-class citizen feels it the hardest,” Bucco said in an interview with NJ Spotlight News.
For more than a decade, Bucco has sponsored legislation that calls for indexing New Jersey’s income tax brackets to the annual rate of inflation, but he’s yet to get it through the Legislature controlled by Democrats.
This year, though, with inflation and affordability emerging as key issues in the upcoming congressional elections, Bucco sees a new opening for lawmakers in Trenton to address the issue head-on.
“Every time my colleagues on the other side of the aisle start complaining about inflation, I point to this bill that’s been (pending) for 10 years that would help,” Bucco said. “I don’t know how you can talk about affordability without talking about this piece of the puzzle.”
Collections up
Bucco’s latest push to index New Jersey’s income tax brackets to inflation comes as state income tax collections are soaring. Collections during the 13-month period through July were up more than 9%, the Department of the Treasury reported earlier this month.
Fritts, the Tax Foundation policy analyst, suggested any future revenue the state would forgo by indexing income tax brackets represents only a fraction of the billions of dollars the state takes in annually from the income tax.
“It’s a small portion of income tax revenue, which means it’s going to matter way more for residents and taxpayers than it will for the state government,” Fritts said.
She also said it tends to be the times when inflation is taking a major toll on consumers that taxpayers also get hit hard by bracket creep.
“The years when peoples’ taxes are going to go up the most because of a lack of inflation indexing are also the years when they’re stretched the tightest,” Fritts said. “That’s when it’s going to hit the most, and the timing is terrible.”
