Is the flat income tax revolution underway across the states enough? No, but it must be advanced.
This extraordinary feat includes four states passing a flat personal income tax in 2022 after only four did over the last century. Now 14 states have or will soon have flat income taxes. But if you consider how the nine states without personal income taxes outperform, on average, the nine states with flat income taxes in economic growth, domestic migration, and nonfarm payroll employment over the last decade, more is necessary.
While flattening income taxes is important, eliminating them is best. And this should be tied to spending restraint to avoid the infamous Kansas problem of excess spending while cutting taxes.
The five states always with a flat income tax were Massachusetts (1917), Indiana (1965), Michigan (1967), Illinois (1969), and Pennsylvania (1971). The next four states initially with progressive income taxes before improving to a flat income tax were Colorado (1987), Utah (2007), North Carolina (2014), and Kentucky (2019).
The four states that passed a flat income tax in 2022 were Idaho (starts in 2023), Mississippi (2023), Georgia (2024), and Iowa (2026). After a recent court decision, Arizona will also have a flat income tax in 2023 at the lowest rate in the nation at 2.5%.
This will support greater economic growth as progressive personal income taxes disincentivize people to work and live in those states. This is happening in California, where even its wealthy citizens are fed up with sky-high personal income taxes that will worsen when the top marginal tax rate rises to 14.4% in 2024.
According to the American Legislative Exchange Council’s 15th edition of the Rich States, Poor States report that compares the economic performance of the 50 states, the nine states already with a flat income tax rank mostly in the middle of the pack from 2010 to 2020.
This includes an average overall ranking for those nine states of 24th based upon three key economic variables with average rankings of 23rd in state gross domestic product (GDP), 29th in absolute domestic migration, and 22nd in nonfarm payroll. The highest overall rankings for these states are Utah (2nd) and Colorado (6th), lowest are Illinois (43rd) and Pennsylvania (45th).
States should seek better outcomes that ultimately help people flourish.
The nine states without a personal income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. These states have average rankings in ALEC’s report of 19th overall, 22nd in GDP, 14th in migration, and 21st in jobs. The highest overall rankings are Florida (3rd) and Washington (5th), with Texas (8th) and Tennessee (10th) also in the top 10, and lowest are Wyoming (41st) and Alaska (49th).
Historically, the nine states with the highest personal income tax rates, including California (ranks 19th) and New York (36th), have underperformed in these economic measures and have dire outlooks ranking 48th and 50th, respectively, in ALEC’s report.
Progressive, high-income tax structures produce undesirable outcomes, and states should work toward eliminating personal income taxes.
Other taxes and policies matter. The Tax Foundation’s latest report on state business tax climates shows how other taxes influence business activity, and thus economic performance.
States without a personal income tax or lower tax burdens overall rank the highest in business tax climate with Wyoming (1st), South Dakota (2nd), Alaska (3rd), and Florida (4th) leading the way. And those states with the highest personal income rates perform worst with California (48th), New York (49th), and New Jersey (50th) being last.
What many of these states without personal income taxes tend to use to fund their spending are consumption-based taxes. The least burdensome form of taxation tends to be a flat final sales tax with the broadest base and lowest rate possible.
Whatever you tax, you get less of it. Taxing consumption results in less consumption but more savings, which can support greater capital accumulation and economic growth while taxing the underground economy, such as drug dealers and undocumented workers.
But the ultimate burden of government is not how much it taxes but how much it spends. Jonathan Williams, who is a co-author of the ALEC report, correctly noted, “There are nine states with no income taxes, and they spend substantially less per capita than states with an income tax.”
When there’s already heavy headwinds imposed by policymakers in Washington and across many states, it’s time to build on the flat tax revolution by cutting or even freezing state budgets, strengthening state spending limits, and eliminating personal income taxes.
Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC. He is chief economist at Pelican Institute for Public Policy and senior fellow at Young Americans for Liberty. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on Twitter @VanceGinn.
READER COMMENTS
Jeremy
Dec 13 2022 at 10:55am
Colorado doesn’t have a flat tax anymore now that envious voters passed a ballot initiative to raise taxes on families making over $300k and waste $100m a year on more expensive school lunches that will be free to all children.
Mark Barbieri
Dec 13 2022 at 11:25am
As someone who lives in one of the non-income tax, generally lower spending states (Texas), I’m curious as to what extra or better services people in the higher spending states get for their money. It would be interesting to see a breakdown of state spending by category along with comparisons across those categories. Are the states that spend more on education getting better education outcomes? Are the states that spend more transportation getting better roads?
Steve
Dec 13 2022 at 12:36pm
The correlations are interesting, but not much discussion as to why flat taxes are inherently better than graduated rates.
Generally, flat taxes have been sold as a way to simplify the tax code. It’s not a valid point, though, as the difficult part of tax computation is determining taxable income. After taxable income is determined, the application of graduated rates is child’s play.
The real benefit of flat taxes is political. As we’re seeing in California, there’s almost unlimited political appetite to raise the top rates since it applies to so few taxpayers. If legislators needed to apply the same rate to all taxpayers, there would be much more political reluctance to raise rates.
robc
Dec 13 2022 at 12:44pm
Colorado unflattened theirs this time around at the polls. While lowering the flat tax from 4.55% to 4.40% in one vote, they also added on a special tax on high income earners.
So Colorado is flat no more. It is mostly flat.
robc
Dec 13 2022 at 12:52pm
The new tax rate is still flat, but if you make more than $300k, you are limited in your deductions, so more of your income is subject to the flat rate.
it looks like there is no phase in either, so there could be a large marginal tax rate on dollar $300,000.
Assuming a non-itemizer (joint filer), it looks like the bump is about $523.60 at that threshold, for a marginal rate of 52360% on that dollar. Then it drops back to 4.4% flat again.
If you itemize or are filing single, it is even worse.
robc
Dec 13 2022 at 12:59pm
The purpose of the new tax…to fund school lunches for all public school kids.
As poor kids already received free lunches, this is a tax on the rich to fund middle class and upper middle class families.
If I were a conspiracy theorist, I might suggest it would be to keep those kids out of the habit of carrying and using cash.
robc
Dec 14 2022 at 10:33am
I think I was off by $9 or so, so I really shouldnt have gone to the dime level on my approximation. Anyway, a $500+ tax penalty on dollar # 300000.
Vivian Darkbloom
Dec 13 2022 at 1:25pm
I understand the logic of the no income tax part of the discussion; but, I’m not so sure about “flat tax”. As Steve mentioned above, graduation of tax rates is not the main or even a significant source of complexity. Most of those “flat tax” states allow various deductions and credits—the real source of a complex income tax system. In addition to that, many of those states require adjustments to federal income in order to arrive at state income. If states really wanted to simplify matters, given the current state of federal play, they would just say: report your federal income and pay, say, 5 percent of that. Inevitably, though, there would need to be adjustments for out of state income and part-year residents.
Also, while I have not checked all the states listed as having a “flat tax”, I view that list has highly suspect. For example, Massachusetts, the first state on the list, allows a “Limited Income Credit”. Sounds to me like a backdoor and somewhat more complicated way to introduce progressive effective rates into the system.
We are always going to have a federal income tax, at least in my lifetime and almost certainly yours. A sensible solution might be to eliminate state income tax all together in exchange for a objectively based revenue sharing from federal government to the states (e.g., based on population). We already have de facto revenue sharing, albeit in a highly complex and labyrinth way.
vince
Dec 13 2022 at 3:18pm
A flat tax rate may need to be high to fund government. At such a rate, at what income level should it apply? Those above the poverty level?
The federal government, for example, would need a flat tax rate of 23 percent. If you exclude those at the poverty level, the rate goes up to 29 percent. That’s a high rate for those who have just exceeded the poverty level.
robc
Dec 13 2022 at 3:50pm
..at current levels of spending. Flat tax at 15% after a standard deduction (no itemization) and then cut spending to fit.
It isn’t the perfect solution, but its pretty damn good.
Note: I told someone once that if the Feds spent less than 15% of GDP, I would shut up about spending forever, hence the reason I chose that number. With the deduction, it might have to be 17% or something to fit spending under 15% of GDP, but whatever. Personally, I would prefer about 5% of GDP, but I will shut up at 15%.
Thomas Lee Hutcheson
Dec 13 2022 at 4:15pm
The redistributive function of taxation should be left to the federal government as should unemployment insurance and other relief in recessions.
Mark Brady
Dec 13 2022 at 10:59pm
“Whatever you tax, you get less of it.” That’s not true of a tax on the site value of land.
robc
Dec 14 2022 at 10:31am
Because the Land Value Tax is the only tax without a deadweight loss.
Its one of the reasons I support the Single Land Tax.
vince
Dec 14 2022 at 1:00pm
A land tax would be great. The problem is implementation. If land generates a 10% return, and the tax is 10%, the land has no after-tax value.
robc
Dec 14 2022 at 1:20pm
Correct, although I think the actual number is about 4%.
The Georgist purpose is to tax away all economic rents of unimproved land. The value comes in improvements made to the land, and that is untaxed.
One of the benefits of the Single Land Tax is it leads to land being used for its highest purpose (or at least close enough). The tax would be the same for an urban lot whether you build a building on it or pave it for a surface parking lot. More than likely that would be a building (although it could be a parking garage if demand is high enough). I don’t know the economics of big city surface parking lots, but I imagine many of them are to generate enough income to pay the property tax and to hold onto the land to speculate. The SLT would get the land away from speculators and to more productive users.
vince
Dec 14 2022 at 4:54pm
At 4 percent, the tax would need to be supplemented with other taxes. I believe the total value of US land hovers around GDP. The US government spends about 25% of GDP.
robc
Dec 15 2022 at 10:59am
No, we would have to cut spending dramatically.
I did a back of envelope calculation previously, and I think we would have to cut spending at all levels by about 2/3rds. I was splitting the SLT 3 ways, between Fed/State/Local. One aspect of it would be NO exemptions, so, for example, churches would have to pay the SLT. Also, the US Fed would owe the state of Wyoming and Park County, WY big checks for their shares of the SLT on Yellowstone (it also extends into other counties and Montana).
robc
Dec 15 2022 at 11:01am
Interestingly, one of the 19th century criticisms of Georgism was that the SLT would raise TOO MUCH money and lead to a larger government.
robc
Dec 15 2022 at 11:08am
I think the SLT creates a natural funding limit, in both directions, on the size of government.
As an area urbanizes and becomes more dense, the value of the land goes up, increasing the tax revenue, allowing for more services to that area. It grows government organically. It keeps it from being too small and, combined with a balanced budget, keeps it from growing too large.
The SLT causes me to veer dangerously close to utopianism. But I recognize it has some problems too. Valuation is hard, but no harder(and should be easier) than currently for property tax, so I really don’t see that as an overriding issue.
Jim Glass
Dec 15 2022 at 6:19pm
A land tax would be great. The problem is implementation.
Indeed it is! Proven by the failed attempts.
Valuation taxes assessed by appraisal are by far the worst to implement.
(1) Valuation is subjective and so endlessly subject to appeal. E.g., think of all the taxes Massachusetts imposes: personal income tax, corporate income tax, sales taxes, estate tax, business taxes of various sorts, down the list. Yet “Ninety percent of the petitions filed at the Board are appeals of local property taxes.” (Google ‘Massachusetts Appellate Tax Board’). I’ve been on the board of a number of NYC real estate corporations and we appealed every property appraisal automatically every year.
(2) They are notoriously subject to corruption — both extortion and bribery. When a whole lot of money depends on somebody’s subjective opinion … lots of incentives there! NYC has had billion dollar property tax assessor scandals. Has anybody ever heard of a billion-dollar income tax auditor scandal?
And the above are both just with simple common property taxes. Land Value Tax is worse. It requires a double appraisal – first of the value of the total property, then of the value of all the improvements on it to subtract same.
And remember, land value is extremely volatile. Land is totally inelastic in supply (the point!) so small changes in demand for it create big changes in its price. (Think: bitcoin). This means that if you make it the root of your tax system, you have to re-assess land value every single year — not once every several years with minor broad adjustments in between as with conventional property tax. And with so much more money involved amid all this subjectivity and volatility, taxpayers’ incentives to litigate explode.
Pittsburgh is the only locale to try to impose a real land tax in modern times, back in 2000, and it was a disaster. (A number of jurisdictions have used faux “split” land taxes, which merely assign a percentage of total property value to land.) The Pittsburgh system collapsed immediately under a tsunami of appeals and litigation It was repealed after just one year, while finishing up all the litigation took years to come.
Occam’s razor: If land tax is such a great idea, and everybody has known it since George’s time and before, and land tax was in fact pretty much the original tax, why is nobody in the world using it now? Politicians try to tax everything. If they aren’t taxing as something as obvious as land … Why?
(As Coase used to say: All those lines on the graph showing supply and demand and elasticity look great, but where are the transaction costs?)
All that is just the start of the practical problems with LVT. Back several years ago I posted a lot more about it on Professor Sumner’s blog:
https://www.themoneyillusion.com/two-quick-comments-on-taxes/#comment-306574
Jim Glass
Dec 15 2022 at 6:30pm
Oh, a bit more that I’d totally forgotten…
“Now, unlike … utopian land taxers, let’s consider the costs of raising this revenue, something they never do…”
https://www.themoneyillusion.com/two-quick-comments-on-taxes/#comment-306731
Boris
Dec 14 2022 at 1:27am
After passing https://ballotpedia.org/Massachusetts_Question_1,_Tax_on_Income_Above_$1_Million_for_Education_and_Transportation_Amendment_(2022) a month or so ago, Massachusetts no longer has a flat income tax.
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