Taxpayers bit by inflation raises may get relief

When most Americans send in their 1979 income tax forms between now and April 15, chances are they will have paid extra tax dollars to Uncle Sam. Thanks to last year's high (13.3 percent) inflation rate, millions of taxpayers received wage increases during the year, automatically pushing them into higher tax brackets. Because the US Tax Code is progressive -- with taxpayers paying proportionally more taxes as they earn more money -- that results in a multibillion-dollar "windfall" gain in revenue for the federal government without any lawmaker's ever having voted for a tax increase.

Now, taxpayers may get some relief from these unlegislated increases, with the help of a new study released here this week by the Advisory Commission on Intergovernmental Relations.m The study urges Congress to "index" the Tax Code to prevent automatic tax gains by both the federal and state governments.

The prestigious commission, established by Congress in 1959, is a bipartisan advisory panel made up of federal-state officials and private citizens. Most of its members are appointed by the president.

Its study is expected to give added impetus to congressional efforts to index the Tax Code.

Under indexing, tax codes would be automatically adjusted for inflation so that the government could not profit through wage increases. This would be done by adjusting to inflation such features of the code as personal exemptions, the standard deduction, and individual tax brackets.

The current tax formula -- at the state, federal, and most state levels -- adds up to "taxflation," according to Sen. Robert Dole (R) of Kansas, a prime supporter of indexing.

During 1979 alone, according to the congressional Joint Economic Committee, the federal government will pick up a tidy "hidden tax increase" of $35 billion, thanks to inflation. In fact, the tax impact of inflation on individuals is even worse than first might be assumed, because of tax increases going into effect for social security.

Congress, has been examining indexing as part of its consideration of the windfall oil profits tax. An indexing proposal recently lost on the floor of the Senate by a relatively small margin. There are estimated to be 40 to 45 proponents of indexing in the Senate alone.

Although Canada and several European nations index their tax codes, the Carter administration has stoutly opposed the proposal.

Paul A. Volcker, chairman of the Federal Reserve System,m also opposes indexing, arguing that it would permanently build inflation into the US wage-tax system.

The new tax study, however, underscores the debilitating impact of inflation on taxpayers.

The report considers its impact on a family of four earning $15,000 to $16, 500. By getting a $1,500 wage increase -- to keep up with inflation -- the family jumps from an 18-percent tax bracket to a 21-percent bracket. Thus the "value of its $4,000 in personal exemptions has diminished by 10 percent," the report notes, while "its federal income tax bill has increased from $1,242 to $1 ,530." Overall, the report notes, the family's total tax bill has jumped more than 23 percent, while its money income has grown only 10 percent.

What happens at the federal level is also repeated in many cases at the state level. For that reason, six states -- Arizona, California, Colorado, Iowa, Minnesota, and Wisconsin -- have enacted measures to index their tax codes during the past several years.

Indexing proposals are also being considered in a dozen or so other states.

Although calls for indexing are increasing on Capitol Hill, few legislators expect any proposal to be enacted into law during 1980, given election-year pressures.

Proponents, however, argue that some form of indexing may make it into law during 1981, particularly if the inflation rate is still at or close to double-digit levels.

Legislative proposals vary. The most popular would essentially index tax-bracket provisions of the code. Some formulas would also index such "peripheral" aspects of the tax form as stock dividends and capital gains income. That means, under the latter, that only the "real increase" in the value of a fixed asset would be taxed.

"Indexation," the report points out, "simply requires the government to play fair with taxpayers. . . . The time seems ripe for its adoption."