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Time to end Az's inflation tax

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Time to end Az's inflation tax

In Arizona's tax code today there is a hidden, automatic tax hike that is based on something you, and even the state legislators and members of Congress who write the tax code, have no direct influence over: inflation.

Luckily, this is not a problem in the federal income tax code on top of the state's. Thanks to the landmark tax cuts of 1982 proposed and signed into law by President Ronald Reagan, the federal income tax brackets are "indexed" for inflation – meaning the brackets move up every year by the same amount as inflation. In Arizona, on the other hand, over time state income taxpayers may be pushed into a higher tax bracket as a result of inflation because Arizona's tax brackets stay exactly where they were the last year no matter what the inflation rate is.

Let's say your pay raise was set at exactly the rate of inflation. You could get pushed into the higher Arizona income tax bracket even though your pay raise was simply meant as a way to keep up with the rising costs of goods. Even at a tame inflation rate, the compound effect of this hidden tax increase can be large over time. Also, the difference between the tax rates grows the further up the scale you go. The jump between the first two brackets may not seem big to some (a 0.29-percentage point leap from 2.59 percent to 2.88 percent). But the next step is even bigger – a 0.48 percent jump between 2.88 percent and 3.36 percent. The leaps only get bigger after that.

Arizona's tax brackets used to be indexed to inflation in the 1980s, but the state legislature in 1990 ended the indexing of the income tax brackets. That action locked into place this automatic tax increase that happens every year. The impact on individual families — especially the working poor — who are hit by this "bracket creep" can be devastating.

Luckily, relief may be on the way for Arizona taxpayers. A bill passed by the House and being considered by the Senate (HB 2439) would eliminate the inflation tax. Hidden auto-pilot tax hikes are not features any state should ever want to keep in their tax code. Passing HB 2439 is an important step that the Arizona Legislature needs to take and the governor needs to sign into law.

Stephen Slivinski is senior economist at the Goldwater Institute.

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