There are currently legislative discussions about changing New Jersey’s system collecting state income tax. As inflation has become a rising concern for citizens across the Garden State and the nation, some voices are trying to prevent taxpayers from getting hit with a silent tax.
New Jersey is a great state for many reasons. We’ve got beaches, mountains, the second greatest portion of protected land in the country (it’s true, I promise), but the fairness of our tax system is definitely not one of the reasons you’d want to live here.
NJ takes more than 47 other states and consistently ranks as one of the most highly taxed states in the nation. As a result, there is no shortage of voices (including this blog) crying out that the business community and private residents alike simply can’t thrive under such conditions.
We’ve discussed this topic in articles about the unemployment insurance rate increase, the creation of watchdog agency OSEC, as well as peripheral discussions through topics like the NJ plastic ban that’s going to be taking place in a couple of months.
Fortunately, there might be some good news coming for taxpayers as State Senate Minority Leader Steven Oroho and State Senator Tony Bucco are sponsoring a long-stalled bill that could combat what inflation is doing to taxpayers’ bottom line.
Let’s get into everything there is to know about this potential new legislation and how it could affect your family.
What is the New Proposed Tax Cut for New Jersey?
To be clear, this is not a direct tax cut, but rather a proposal to conduct “inflation indexing,” adjusting New Jersey’s tax brackets each year to keep track with the Consumer Price Index. In layman’s terms, this says that tax brackets would be annually altered according to inflation.
Quoting the bill (S676) to be discussed by the NJ Senate Budget Committee this coming Monday, “The director shall annually recompute the taxable income bracket amounts and tax amount per taxable income bracket by multiplying each adjusted taxable income bracket amount by the cost-of-living adjustment, and recomputing the taxable income bracket amounts at the statutory tax rates with the recomputed bracket amounts.”
If that seems like it’s in a foreign language, I’ll summarize. Think about your grandparents talking about how a dime used to get you a sandwich and a coke (or whatever). The purchasing power of a dime has gone down in the time since then. A dime won’t get you…well, it won’t get you anything anymore, you need more money to buy a sandwich and a coke.
This isn’t inherently bad, so long as wages keep pace with inflation and the tax system takes into account the purchasing power that a dime, or dollar, has. Currently, the NJ State tax system does not adjust their tax brackets, so they’re taking a far greater amount of taxpayers’ earnings than many would consider fair.
Jumping from the age-old, “when I was your age, a dime would…” trope and into real-life examples, let’s discuss an individual’s annual income. For the purposes of simplicity, pretend that there’s not a federal/state split in taxation and imagine we all live in the Republic of New Jersey.
Let’s say that Ulysses made $60,000 in 2019, and his mortgage is $1,250 a month, leaving him with $45,000 to spend on his life. The consumer products and services he purchases in a year cost him $30,000, he pays $12,000 in taxes and saves $3,000.
With inflation going wild since 2019, the goods and services he used to get for $30,000 now cost $35,000. When tax time comes, he won’t be paying substantially more in terms of the dollar amount, but he will be giving the state a far greater amount of his purchasing power, as his money doesn’t buy him as much as it used to.
There’s even a term for this, “bracket creep,” meaning that a tax bracket that was once taxing a fair (or fairer) amount of money from taxpayers is now taking an unfair amount as the amount being taxed simply isn’t that much money anymore!
As someone in their 30’s, I can tell you, as a teenager, $100,000 used to seem like an incredible amount of money to earn each year. Nowadays, that’s far less than I feel I’d even need to have a happy and healthy life.
Why is This Effort Getting Attention Now?
After a 2021 in which inflation was calculated at 7%, proceeding a pair of the worst financial years imaginable, it’s only fair that taxpayers don’t have to surrender a larger portion of their purchasing power at a time that they need it the most.
Truth be told, New Jersey is only amongst 13 that don’t have some form of inflation indexing in their state tax system. The bill sponsored by Sens. Oroho and Bucco has been proposed every year since 2016-2017 (here’s the 2016-2017 version), but an article on the subject noted this discussion has gone back over a decade.
Remind Me, What is the Consumer Price Index?
While the Consumer Price Index (CPI) is not synonymous with inflation, it is one of the metrics used to calculate inflation. In many ways, it’s actually a much more comprehensive measure as it’s not vague but speaks to specific products and services.
Just take a look below; you’ll see what I mean.
For those that want to learn more about this topic, there’s a link to the source (Bureau of Labor Statistics) embedded in the image above. Give it a click and learn a little more!
Wrapping Up
While this bill is only at the point of reaching a committee next week, it appears that the power of public frustration will certainly give it a better chance than it’s had in past years. I hope to be writing another article sometime this year, telling you all about how the tax brackets are going to shift in your favor.