How does ESPlanner handle state taxes?

Broadly speaking, there are two different kinds of states:

1. Those who automatically index their tax brackets to the inflation rate and
2. Those who don't.

A lucky few live in states with flat-ish taxes (a more rational approach to taxation, not the best, but closer) and we will ignore those for the purposes of this discussion.

In the first case, ESPlanner automatically applies inflation indexing to the tax brackets going forward in time.

The second case is a little more problematical. Clearly it is in the best interests of a state's revenue stream to never re-index their tax brackets. Over time inflation and real wage increases would push the population into higher and higher tax brackets (as is happening with the federal alternative minimum tax) thus maximizing revenue.

Equally clearly, they can't politically do this since each state competes against all other states for population and business. The nominal tax payments are a significant component of the decision to move to a specific location. For example, how many of you are considering moving to a lower tax state or becoming an ex-patriate upon retirement? This move alone can contribute significantly to your standard of living.

So, what does ESPlanner do? Well, we guess and Larry and I argue about the guesses from time to time. The current algorithm is based on the assumption that states not indexing their brackets to inflation will re-index their brackets from time to time to adjust them for bracket creep due to inflation and real wage growth. Even states indexing their brackets for inflation will have to re-index occasionally due to real wage growth, just not as often.

So here's what happens:

1. If a state has not re-indexed within the time span covered by our records then we start indexing by inflation starting 4 years after the current year (2011 would be the first year in which inflation gets applied to brackets).
2. Otherwise start applying inflation 4 years after the last time the state re-indexed its brackets.