New York State’s political campaign contribution limits automatically are “indexed” to rise with inflation in the years following general elections. But the state’s personal income tax brackets, exemptions and standard deductions are not adjusted to reflect the cost of living. As a result, middle-income New Yorkers have been hit with steady stealth tax hikes over the past decade or so, as I explain in today’s New York Post.

In 1997, for example, a family at the statewide median-income level earned $50,000 and sent 3.3 percent of its gross income to Albany. By 2010, median income had risen to $70,000 — essentially keeping pace with inflation — but under New York’s nonindexed tax code, the effective tax rate came to 3.8 percent. The difference translates into a hike of about $326 a year.

The difference for taxpayers is larger in higher-income downstate suburbs, where the cost of living is higher. In Long Island, where the median family income has risen to $103,000, state income taxes for 2010 are about $413 higher than they’d have been if the 1997 tax code had been linked to inflation.

New York’s largest stealth tax increases fall on those in the upper bands of the downstate middle class. For a family of four with income of $130,000 in 2010 dollars, the failure to link the 1997 tax code to inflation translates into an added tax bill of roughly $1,000.

[snip]

The short-term fix is obvious: Index New York’s tax brackets, standard deductions and personal exemptions so they automatically rise with the Consumer Price Index every year. This could be done now, retroactive to the start of 2011, and the impact on state revenue will still be barely discernible in the year ahead.

In the long run, New York’s entire state personal income tax is overdue for an overhaul. The goal should be twofold — lower the tax rates and broaden the taxable income base through elimination of loopholes. And stop the stealth tax hikes, once and for all.

P.S. — New York City’s resident income tax isn’t indexed for inflation, either.

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