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 non-farm 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.
