Inflation and legislative inaction drive up tax bills in some states

Posted: Friday, March 29, 2002

For taxpayers in at least a half-dozen states from Alabama to Hawaii, next month's bill will likely take a bigger bite than last year's because legislators don't account for inflation when they craft tax law.

The problem is that governments in those states do not automatically increase their standard deductions along with inflation, leaving middle- and lower-income taxpayers with bills that have grown steadily for years.

''It's a built-in tax increase,'' said Oklahoma state Rep. Dan Webb, an accountant and Republican who has pushed for change for over a decade. ''We've been basically cheating the taxpayers of Oklahoma for all these years.''

Since 1982, his state's standard deductions have remained unchanged, with a top level of $2,000 for singles. Alabama ($2,000 for singles) also hasn't changed since 1982. Hawaii ($1,500 for singles) hasn't changed since 1989.

Other states in similar situations include Georgia, Louisiana and Virginia -- plus the District of Columbia.

In comparison, the federal government tied its standard deductions to inflation in 1985 by a technique known as indexing, and has seen the standard deduction for singles grow from $2,390 in 1985 to $4,550 this year.

Of the 41 states that levy an income tax, nearly half increase their deductions as inflation rises. Most others adjust their deductions sporadically. The rest have allowed their standard deductions to languish.

To decrease a taxpayer's bill, tax codes provide standard deductions for single taxpayers, married couples (who can file jointly or separately) and single heads of households.

The majority of taxpayers use the standard deduction rather than itemize. In 1999, 67.5 percent of taxpayers claimed a federal standard deduction, the Internal Revenue Service estimated. In Oklahoma, 61 percent used the standard deduction for state income taxes.

Lawmakers in some states that haven't adjusted their deductions for a decade or longer are fighting to increase them now, but acknowledge tough odds in a year when nearly every state is facing budget shortfalls.

The lack of action means at least $4,000 lost over the past decade to an Alabama family of four with an income of $42,000, said Kimble Forrister, executive director of Alabama Arise, a Montgomery-based advocacy group for the poor.

His group wants to raise the state standard deductions to match the federal deductions, at an estimated cost of $300 million, which would mean a family below the poverty line wouldn't owe any income tax.

What rankles critics the most is that the inflation-driven tax liability hits taxpayers with the lowest incomes, since they are most likely to rely on standard deductions rather than itemizing deductions.

''People who are simply struggling to keep up with the cost of living will be progressively taxed at higher rates, as if they were getting richer,'' said Pete Sepp of the National Taxpayers Union. ''It's almost as if being thrown a concrete life preserver when you're trying to keep your head above water.''

Tax administrators say that focusing solely on standard deductions ignores other steps lawmakers may take to ease the financial burdens of the tax system.

''From a policy impact, you need to consider other factors,'' said Harley Duncan, executive director of the Federation of Tax Administrators. ''They may not be making an adjustment on deductions, but are you lowering property taxes? Or adjusting sales taxes?''

Georgia, for instance, while failing to adjust its standard deductions since 1987, has just increased its personal exemption -- a different category of deduction that decreases a person's tax liabilities.

Several other states that haven't changed deductions for singles have increased them for married couples, as in Kansas, Mississippi and North Carolina. Oregon increased the standard deduction for married couples, but also raised the tax burden for singles -- and will begin indexing in 2003.

Also, the relatively slow rate of inflation in recent years means a less flagrant increase in tax liability compared to the double-digit inflation of the early 1980s, Duncan said. Back then, public pressure drove Congress to begin indexing for inflation.

Neither low inflation nor budget shortfalls are reason to let the current situation continue, said Webb in Oklahoma.

''This is one case where even the IRS is doing better than the Oklahoma legislature,'' he said. ''Isn't that terrible?''


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