Emily Peck writes that “inflation adjustments are kind of sexy again.” I’m not sure I agree with that specific characterization, but I definitely get her point.
After decades of underwhelming relevance, cost of living adjustments (aka COLAs) for 2023 will likely be higher than they've been in many years and could actually lower the income taxes many Americans owe in 2023.
As Peck observes, COLAs on certain taxes, social security payments and wages have hardly been noticed since the late 1970s and early 80s.
For example, social security COLAs from 1979-1982 were 9.9%, 14.3%, 11.2% and 7.4%, respectively (an average of 10.7% – reflecting that high CPI).
But they’re critical now, especially for less well-off Americans coping with the effect of the highest inflation in over 40 years.
Take social security again. Over the 20-year period of 2000-2019, the average annual COLA was about 2.2% (including no COLA adjustment in 2010, 2011 and 2016 and a 0.3% increase in 2017).
Granted, not all salaries – particularly in the private sector – are subject to COLAs; those workers have to depend on promotions, bonuses or new, higher-paying jobs at other companies to keep up with rising prices.
And many taxes and deductions aren’t adjusted for inflation at all (the U.S. tax code is a bit of a hodgepodge).
In fact, the Wall St. Journal recently remarked, "These inflation adjustments can hardly be called a silver lining, as Americans are paying more for everything from housing to food and energy.”
By Dave Allen for Discount Gold & Silver
Emily Peck writes that “inflation adjustments are kind of sexy again.” I’m not sure I agree with that specific characterization, but I definitely get her point.
After decades of underwhelming relevance, cost of living adjustments (aka COLAs) for 2023 will likely be higher than they've been in many years and could actually lower the income taxes many Americans owe in 2023.
As Peck observes, COLAs on certain taxes, social security payments and wages have hardly been noticed since the late 1970s and early 80s.
For example, social security COLAs from 1979-1982 were 9.9%, 14.3%, 11.2% and 7.4%, respectively (an average of 10.7% – reflecting that high CPI).
But they’re critical now, especially for less well-off Americans coping with the effect of the highest inflation in over 40 years.
Take social security again. Over the 20-year period of 2000-2019, the average annual COLA was about 2.2% (including no COLA adjustment in 2010, 2011 and 2016 and a 0.3% increase in 2017).
Granted, not all salaries – particularly in the private sector – are subject to COLAs; those workers have to depend on promotions, bonuses or new, higher-paying jobs at other companies to keep up with rising prices.
And many taxes and deductions aren’t adjusted for inflation at all (the U.S. tax code is a bit of a hodgepodge).
In fact, the Wall St. Journal recently remarked, "These inflation adjustments can hardly be called a silver lining, as Americans are paying more for everything from housing to food and energy.”
Lions and Tigers and Bracket Creep, Oh My!
The IRS adjusts tax brackets every year to ward off "bracket creep" – i.e., when your salary rises to keep up with inflation, pushing you into a higher tax bracket and a larger tax obligation.
Peck points out that this phenomenon “is easy to understand if you go back and look at salaries from decades ago.”
She says to assume that IRS tax brackets were still set at the 1980 level, then someone earning $34,000 a year – “a tidy sum at the time” – would face a 49% tax rate.
As Peck suggests, the voting public would consider those figures “extremely regressive in 2022.”
Congress wrote the annual inflation adjustments into the tax code as part of the Economic Recovery Tax Act of 1981, with most of the credit going to President Ronald Reagan.
Before then, during the aforementioned period of high inflation, brackets weren't adjusted at all, much less every year.
As early as the end of next week, or as late as early November, the IRS will announce the 2023 adjustments.
Kyle Pomerleau at the nonpartisan American Enterprise Institute think tank has already put out his projections:
He sees the upper limits on tax brackets going up around 7% next year. In 2022, the 24% tax bracket maxed out at $89,075, but in 2023, that should increase automatically to about $95,375.
The IRS will also incorporate the effects of inflation by adjusting its tax withholding tables used by employers to calculate payroll deductions (found in IRS Publication 15-T).
Taken together, Peck believes these changes could mean more take-home pay next year – even if your salary doesn't change from December to January, assuming no other changes to their withholding.
That’s Not All, Folks!
Other notable inflation adjustments are:
Not adjusted: The $10,000 cap on the popular state and local tax deduction won't change. Neither will the child tax credit.
If Congress doesn't do anything, inflation will steadily erode those tax breaks into eventual oblivion.
Peck says to watch the 2023 inflation adjustment on social security, which the Senior Citizens Leage expects to be 8.7% – the highest since 1981.
That’s expected to bring current – and future – retirees some good news next week after the September CPI is released.
Gas On the Rise Again
One of the primary factors that will influence COLAs next year is the price of oil. Gasoline futures have started to inch up again – just in time for next month’s midterm elections and 2023 COLA adjustments – after the global oil cartel led by Russia and Saudi Arabia vowed to cut oil production.
Matt Phillips warns, “[I]f sustained, wholesale gas prices could lead to an uptick in consumer prices, reinvigorating inflation as a political issue.”
Regardless, most polls still have inflation as the number one, two or three issue on the minds of voters.
Philips reports that a key U.S. wholesale futures price for RBOB – a kind of unfinished gas that's blended with ethanol before being sold to consumers — is up more than 13% this week, to roughly $2.70 a gallon.
He suggests the trajectory implies that consumer prices will increase in the coming weeks. The national average price at the gas pump is just shy of $3.90, according to AAA.
That's significantly lower than the record-high prices of over 5 bucks a gallon we saw over the summer.
Still, it's unhelpful to the Biden administration and congressional Democrats alike, which have pointed to falling gas prices in recent months.
And it’s certainly not useful to the Federal Reserve, which continues to fight the effects of high inflation with substantial interest rate hikes.
But the opposite for Republicans looking to gain control of the U.S. House and Senate and to extend their majorities in state houses across the countries.
So far, Phillips notes, the market reaction to the production cut news “has been somewhat muted.”
But with the global engine of economic growth and oil consumption (China) struggling in its own right, concerns about the resulting pressure on worldwide demand – and pricing – are growing.
Yet, as Phillips observes, Biden’s willingness to hit up the nation’s Strategic Petroleum Reserve also “appears to have insulated the market”…for now.