Inflation is eating away at peoples’ incomes and savings, and even though states’ tools are limited, constituents demand action. Some states have turned to income tax rebates and sales tax exemptions for groceries, but these policies exacerbate inflation while creating additional complexity. There are better policies to mitigate—and even help solve—inflation while better orienting tax codes to promote long-term economic growth.
Inflation is often called a “hidden tax,” but it will cause a literal tax increase in states that fail to adjust their tax brackets for changes in consumer purchasing power. When tax brackets, the standard deduction, or personal exemptions are not inflation-adjusted, they lose value, raising tax burdens in real terms. A similar phenomenon occurs with the value of property and the subsequent increase in property taxes.
Business investment is also getting more expensive. Tax policy changes at the federal level this year increase the cost of investment (exacerbated by high inflation), which means fewer of the very investments that could help control inflation in the first place. Fortunately, there is a simple way forward: states can follow Oklahoma’s lead and make full expensing permanent.
The Tax Foundation hosted a Talking Tax Reform webinar to discuss inflation indexing and property tax limitations as ways to avoid unlegislated inflation-linked tax increases. We highlighted the role of permanent full expensing in facilitating the reinvestment necessary to grow our way out of high inflation.
Our experts, Jared Walczak and Katherine Loughead, did an overview of states’ options, critiquing the ones that don’t work and highlighting the ones that do. Jared and Katherine also answered questions from the audience and questions sent in through registration.
Tune in to learn what states can do to improve their tax codes when inflation is high.
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