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1 Lyman Stone, Inflation Indexing in the Individual Income Tax 1 (2014)

handle is hein.taxfoundation/taxfaaoe0001 and id is 1 raw text is: Inflation Indexing in the Individual Income Tax Lyman Stone Economist, Tax Foundation Testimony before the Maryland House Ways and Means Committee February 18, 2014 Chairperson Hixson, Vice-Chairperson Turner, Members of the Committee: My name is Lyman Stone, and I'm an economist at the Tax Foundation. For those unfamiliar with us, we are a non-partisan, non-profit research organization that has monitored fiscal policy at all levels of government since 1937. We have produced the Facts & Figures handbook since 1941, we calculate Tax Freedom Day each year, we produce the State Business Tax Climate Index, and we have a wealth of other data, rankings, and information at our website, www.TaxFoundation.org. In my testimony today, I will offer a brief description of why inflation indexing is important, and how it should function in an ideal tax code. Inflation Indexing is a Standard Feature in a Modern Tax Code Since the federal government's adoption of it in 1986, inflation indexing has become increasingly standard in state income tax modernizations. Of the 34 states with bracketed income tax systems, 14 of them wholly or partially index their tax brackets to inflation. It enables state tax codes to remain fair and appropriate without frequent legislative intervention. House Bills 0522, 0528, and 0557 all include reforms which would incorporate significant components of inflation indexing in key components Maryland's tax code, such as the standard deduction, personal exemptions, and the tax brackets themselves. While we at the Tax Foundation take no position on legislation, I hope to give a review of the topic at hand and contribute our understanding of the related economic literature. Inflation Indexing is Vital for Taxpayers and Employers In a state that does not index tax provisions to inflation, taxpayers suffer from what is known as bracket creep. This phenomenon causes wage inflation to push nominal wages, or a worker's wages on paper, up even as taxpayers' purchasing power remains the same. With higher nominal wages, they are pushed into higher tax brackets and owe more taxes. Paying higher taxes on income that is worth the same amount is especially damaging for low-income taxpayers, who are the most likely to suffer from significant bracket creep due to Maryland's numerous clustered tax brackets on lower income levels. 1

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