The beginning of each year is the season when many people (especially CPAs and other tax professionals) await the announcements of a variety of inflation adjusted numbers that will affect everything from what federal tax rate people will pay on the next dollar they earn, how much people can contribute to their retirement accounts, and well as their increase in social security benefits and Medicare premiums.
As a Delaware taxpayer and tax professional I don’t look for any inflation adjustments to our state tax brackets, personal exemptions or standard deduction. Not that I think it would be warranted.
There are only 11 states that do not inflation adjust their taxes, and Delaware is one of them.
The last time my home state established the income tax brackets was in 2013 where the 6 tax brackets tax percentage range from 2.2% to 6.6%. The top rate kicked in at $60,000. The standard deduction was determined for tax years after 12/31/1999 and that was $3,250 per taxpayer.
Why is inflation adjustment important? According to the Tax Foundation, “If individual income tax provisions are not adjusted for inflation, taxpayers’ burdens increase over time, with the greatest increases often concentrated among lower- and middle-income taxpayers.” and “inflation increases tax burdens both by increasing the share of taxpayers’ income that is subject to tax even if their earnings have not increased in real terms”
Using a very simple inflation calculator, our highest tax bracket should be about $95,000 and by using that bracket the average taxpayer would not pay the highest rate.
Aside from indexing the brackets, perhaps the biggest break that can be given to lower- and middle- income earners is to increase the standard state deduction. People who mortgage their homes and pay large real estate taxes can itemize those deductions in amounts that greatly exceed the Delaware state standard deduction. People who rent are pretty much stuck with the low standard deduction.
I’ve spoken to my state representatives about this, and it appears that the only solution to helping the state taxpayers hit by high inflation our legislators are interested in is to add another three or so brackets with higher tax rates.
Even the newly elected Delaware governor campaigned on “I don’t think it’s right that Delaware families making $70,000 a year pay the same tax rate as Delaware families making $70 million a year.”
Our state should be so fortunate to have a resident or two with $70 million of taxable income as that family would pay an effective tax rate (tax divided by income) of just a smidge under 6.6% or $4,618,000. The resident taxpayer family earning $70,000 where each adult earning $35,000 would have a 3.62% effective tax rate and pay about $2,500. Is it fair for one person to pay so much tax to our state or even a group of people to pay a large portion of income taxes?
Our federal government also has a graduated income tax rate. According to the Tax Foundation based on IRS data for 2022 show that the top 1% of filers paid 40.4% of income tax revenue. The top 10% shouldered 72% of the revenue burden. The bottom half of filers, combined, paid 3%, and that’s an overstatement because it doesn’t account for “refundable” credits, which are treated as spending. I must admit I’ve tried to research the state level contributions of Delawareans by income category and it’s a bit of a challenge.
There is access to the Delaware data via an open data source but it’s complicated. I welcome anyone to take on the challenge to parse this data on our Delaware state level.
I’ve also heard a comment about how the “guy with dirt under his fingers” shouldn’t pay as much as the person much more. Inflation adjustments and perhaps some increased personal exemptions would give the “guy with dirt under his fingernails” a greater break than the simple-minded increase in the number of brackets and rates. Perhaps better politically to raise taxes on higher earners rather than look to give low and middle taxpayers a break.
Money goes where it is welcome. If Delaware could welcome more higher earners escaping New York and New Jersey high taxes by leaving our top rate as it is perhaps, we could afford to inflation adjust the brackets to let average and lower income hardworking taxpayers keep more of their wage increases.
Linda Tabeling is a certified public accountant that founded Tabeling & Company. She is a relative of the editor, Katie Tabeling, and the two did not work together on this opinion piece.
