The States Move Forward with the Flat Tax

By Jonathan Williams

Friday, July 22, 2022

 

The drive for a flat tax, started by the great Steve Forbes many years ago, may have stalled at the federal level, but the idea is finding new life in the 50 “laboratories of democracy.” As 46 states just kicked off their new fiscal year on July 1, and we reflect on some of the major policy changes that have transpired, it is evident that a flat-tax revolution is already underway.

 

In 2022, a new record of four states — Iowa, Mississippi, Georgia, and Arizona — have made the leap from a progressive tax on personal income to a flat tax. In early March, several hours before giving her rebuttal to President Biden’s State of the Union address, Iowa governor Kim Reynolds signed into law aggressive tax cuts, which consolidated Iowa’s nine personal-income brackets into a single rate and lowered the rate from 8.53 percent to 3.9 percent. These historic changes will result in a $2 billion tax cut for Iowans.

 

In Mississippi, lawmakers passed a plan in early April to lower and flatten the state’s personal-income tax. Mississippi speaker of the house Philip Gunn, a true champion for real tax reform, called the plan “a huge win” for the state of Mississippi. The $525 million tax cut, the largest in the state’s history, lowers the top marginal rate from 5.00 percent to 4.00 percent by 2026 and eliminates the bottom two brackets.

 

In early April, legislators in Georgia approved, and Governor Brian Kemp signed into law, a plan to flatten and gradually lower the Peach State’s tax rate from 5.75 percent to 4.99 percent. The plan is contingent on meeting revenue triggers year after year through 2030, but the reform could result in a tax cut of over $1 billion for Georgia taxpayers.

 

Last year, legislators in Arizona passed a historic $1.9 billion tax cut in response to Proposition 208, which was passed on the November 2020 ballot. Proposition 208 implemented a 3.5 percent surtax on personal income that would have made Arizona’s top rate effectively 8 percent. The tax cuts passed in 2021 implemented a plan to gradually reduce and flatten the personal-income tax, while offsetting the surtax and making the top rate effectively 4.5 percent. That was already good news. Then a March 2022 decision by the Arizona Supreme Court overturned the Proposition 208 surcharge and greatly benefited taxpayers. As a result, Arizona will have a flat tax of 2.5 percent by 2024.

 

The $2 billion tax cut in Iowa, the $525 million tax cut in Mississippi, the $1 billion tax cut in Georgia, and the $1.9 billion tax cut in Arizona were all the result of unprecedented budget surpluses. Critics warn of future budget crises, claiming the surpluses are only temporary products of the funding doled out to the states through the federal American Rescue Plan Act (ARPA). To be sure, tax revenues always ebb and flow — especially when states are overly dependent on capital-based revenue sources, like income taxes. However, the prudent policy choice for states is to enhance competitiveness, then examine spending priorities and create policies to prepare for the proverbial rainy days, rather than relying on the federal government to save the day during revenue shortfalls.

 

Many states are seeing significant levels of natural tax revenue growth, creating the surpluses even apart from the federal government’s multiple state aid packages, which are generally counterproductive due to burdensome federal requirements (e.g., the attempt by the Biden administration to use ARPA to prevent states from cutting taxes). Additionally, the budgetary doomsday predicted by flat-tax naysayers has not come to pass in states like North Carolina and Utah, which adopted flat-tax policies in the past 15 years.

 

Take the case of North Carolina. A decade ago, North Carolina had a progressive personal-income tax with a top rate of 7.75 percent. In 2013, the North Carolina legislature passed a plan to flatten the personal-income tax. Today, North Carolina’s economic outlook ranks second-best in the 2022 edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, the state has a flat-tax rate of 4.99 percent, boasts robust in-migration from other states, and still enjoys healthy personal-income tax revenue growth. As economist Richard Vedder explained: Taxes do not redistribute income, they redistribute people.

 

Late last year, North Carolina lawmakers passed legislation that would lower their flat personal-income tax rate to 3.99 percent and phase out the corporate-income tax entirely. That budget was signed into law by Democrat Governor Roy Cooper, proving pro-growth tax reform can and should be a bipartisan goal. With the phase-out of the corporate-income tax, it is possible North Carolina legislators will phase out the personal-income tax next.

 

The flat-tax revolution is alive and well, and it will continue to gather speed as more states begin to realize the competitive benefits earned by a simpler and fairer tax code. And should these cuts be the first steps to full elimination of the personal-income tax, the collective actions from Iowa, Mississippi, Georgia, and Arizona could be a harbinger of an even greater tax-policy revolution.