So when did tax brackets start inflation indexing? In 1985, via the Economic Recovery Tax Act of 1981. To see why Congress acted, start with what came before: in 1960, about 3 percent of American taxpayers faced a marginal tax rate of 30 percent or higher. By 1981, that number was 34 percent. Nobody had passed a tax increase that big. Inflation did it: as wages rose to keep up with prices, the fixed dollar thresholds of the tax brackets stayed put, and taxpayers slid into higher brackets on income that bought no more than before. Economists had a name for it: bracket creep.
What bracket creep actually did
Picture a worker earning $25,000 in 1974, sitting comfortably in the middle brackets. Inflation runs near 10 percent a year for several years. Employers raise pay to keep up, so by 1981 the same worker earns roughly $50,000. Her purchasing power has not grown at all, but the tax code does not know that. Its bracket thresholds are still printed in 1974 dollars. She now pays a higher percentage of her income in tax than she did seven years earlier, for the privilege of standing still.
Multiply that by the whole country and you get a silent tax increase, one that raised government revenue without any politician having to vote for it. During the Carter years, 1977 to 1981, inflation averaged about 10 percent annually, and bracket creep became what one economist called "bracket gallop." It hit lower-income filers hardest, because the income range of the lower brackets was narrowest, so it took less inflation to shove a modest earner into the next one up.
1981: when tax bracket inflation indexing became law
The Economic Recovery Tax Act of 1981, signed by President Reagan, did two things: it cut rates for 1982 through 1984, and it indexed the tax brackets for inflation beginning in 1985. Indexing meant the bracket thresholds, the standard deduction, and personal exemptions would rise each year with the Consumer Price Index. From 1985 on, inflation alone could not move anyone into a higher federal bracket. Only an increase in real income could do that.
Why the four-year wait? The phase-in was part of the legislative bargain, and the delay also meant the Treasury kept collecting the inflation dividend a little longer. The Tax Reform Act of 1986 then reaffirmed indexing for tax years beginning in 1989, after a brief adjustment period. The principle survived: brackets move with prices.
2018: the switch to chained CPI
For more than thirty years, the inflation measure used was the CPI-U, the Consumer Price Index for All Urban Consumers. The Tax Cuts and Jobs Act of 2017 changed the mechanism: starting in 2018, brackets are indexed using chained CPI-U (C-CPI-U) instead. Chained CPI grows slightly more slowly, because it accounts for consumers substituting cheaper goods when prices rise. The difference is small in any single year, but it compounds: bracket thresholds now rise a touch more slowly than they would have under the old measure. Over decades, that means slightly more income taxed at higher rates than under CPI-U indexing.
The states that never got the memo
Here is the part most people miss: federal indexing does not cover state income taxes. Many states indexed their brackets after the federal lead, but a long list did not, according to Tax Foundation tracking. As of recent analyses, the states without inflation-indexed brackets include Alabama, Connecticut, Delaware, Georgia, Hawaii, Kansas, Louisiana, Maryland, Mississippi, New Jersey, New Mexico, New York, Oklahoma, and Virginia.
That means a worker in one of those states can still experience old-fashioned bracket creep at the state level: a cost-of-living raise pushes state taxable income into a higher state bracket even when real income is unchanged. The federal fix never reached them.
Why this matters for reading the data
Indexing is the reason comparing a 1978 bracket to a 2026 bracket in nominal dollars is meaningless without an inflation adjustment. A $16,000 threshold in 1978 bought roughly what $80,000 buys today, and the unindexed thresholds of the pre-1985 era drifted against taxpayers every single year. That is why our dataset presents every year in inflation-adjusted 2026 dollars alongside the nominal figures: it is the only honest way to see what the brackets actually meant.
My take
I think bracket indexing is one of the most underappreciated taxpayer protections in the code. It is invisible when it works, which is always, and the 1970s are the proof of what the alternative looks like: a 3-percent-to-34-percent explosion in the share of taxpayers facing 30-percent-plus marginal rates, with no vote and no debate. The chained-CPI switch and the unindexed states are where the quiet erosion still happens. If you want to know whether your tax burden is really rising, check the thresholds, not just the rates.
Frequently asked questions
- When did tax bracket indexing start?
- The Economic Recovery Tax Act of 1981 established inflation indexing of federal income tax brackets, the standard deduction, and personal exemptions, effective beginning in tax year 1985. The Tax Reform Act of 1986 reaffirmed indexing for years beginning in 1989.
- What was bracket creep?
- Before 1985, federal tax bracket thresholds were fixed in nominal dollars. When inflation pushed wages up, taxpayers moved into higher brackets even though their real purchasing power had not grown, effectively raising their taxes without any change in the law.
- Which states do not index their tax brackets for inflation?
- According to Tax Foundation tracking, states without inflation-indexed brackets include Alabama, Connecticut, Delaware, Georgia, Hawaii, Kansas, Louisiana, Maryland, Mississippi, New Jersey, New Mexico, New York, Oklahoma, and Virginia. Taxpayers in those states can still face state-level bracket creep.
- What is chained CPI and why does it matter for brackets?
- Since 2018, federal brackets have been indexed with chained CPI-U rather than CPI-U. Chained CPI rises slightly more slowly because it accounts for consumer substitution. Over many years, the compounding difference means bracket thresholds grow a bit more slowly than they would under the old measure.