Study: Unindexed tax brackets an inflation ‘stealth tax’ on Louisiana residents

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(The Center Square) – Louisiana does not index major tax components to inflation, and the result is a “stealth tax” on state residents, a new study suggests. The finding comes from the Tax Foundation, a Washington-based research nonprofit. In the study, “As Inflation Rises, So Will Tax Bills in Many States,” the group highlights how the current surge in inflation is affecting taxpayers at the state level.

According to the U.S. Bureau of Labor Statistics, inflation rose 5.4% over the past year, the highest increase in decades.

In Louisiana, not only have prices gone up for consumers, but the state’s failure to index income tax brackets, personal exemptions and other items to inflation will lead to higher tax burdens for many residents, said Jay Walczak, the Tax Foundation’s vice president of state projects.

“This phenomenon is called ‘bracket creep,’” he wrote. “Bracket creep occurs when more of a person’s income is in higher tax brackets because of inflation rather than higher real earnings.”

Walczak uses the example of a Delaware resident making $64,000 annually to explain the point. Like Louisiana, Delaware does not index state income taxes.

If the resident made $60,000 in 2019 and received a $4,000 pay increase since, the resident has effectively lost the $4,000 because of rising inflation. Additionally, income tax must be paid on the full $64,000, and the resident is subject to a higher tax rate because Delaware has a 6.6% tax bracket beginning at $1 over $60,000.

“Inflation is often called a hidden tax, but in many states it yields a far more literal tax increase as tax brackets fail to adjust for changes in consumer purchasing power,” Walczak said. 

Tax brackets in Louisiana apply on a graduated scale according to taxpayer income and filing status. Individual filers fall into a 6% bracket when earning more than $50,000, and married couples filing jointly pay 6% when earning more than $100,000.

The study further shows how inflation affects capital gains. Since 2001, cumulative inflation has reached 55%, it said, making a $10,000 capital gain roughly equal to $4,500 in current value.

“The absence or insufficiency of cost-of-living adjustments in many state tax codes is always an issue, as it constitutes an unlegislated tax increase every year, cutting into wage growth and reducing return on investment,” Walczak said. “During a period of higher inflation, however, the impact is particularly significant.”

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