Legislators in eight blue states kicked off the year introducing a coordinated package of tax hikes targeting upper income households. While that effort attracted considerable media coverage, the more dominant theme in state capitals this year when it comes to tax policy is not widespread interest in soaking the rich, but rather a continuation of the multi-year trend of states moving to lower and flatter income tax rates, with some lawmakers and governors aiming for full income tax repeal.
California’s $22 billion annual budget deficit has generated headlines, but the Golden State is an outlier among states when it comes to public finances. “State and local governments are really flush these days,” Federal Reserve Chairman Jerome Powell said at a February 1 press conference, adding that because of this, “many of them are considering tax cuts or even sending checks.”
Fed Chair Powell is correct. In fact, a state that was a symbol for GOP dysfunction only weeks ago, Ohio, is now an example of how, even amid intra-party discord, Republicans of all stripes are still able to unify in the name of rate-reducing tax reform. By setting that as a top priority for the year, Ohio House Speaker Jason Stephens (R) and his leadership team have put forth an agenda that will do much to rectify disharmony and ease tensions in Buckeye State Republican ranks stemming from Stephens’ unexpected ascension to the speakership in January, something that was accomplished with Democratic votes.
Ohio currently has a progressive income tax code with four brackets, the highest rate being 3.99% and the lowest set at 2.765%. The bill number that Speaker Stephens assigned to flat tax legislation sponsored by Representative Adam Mathews (R), which would move Ohio to a flat 2.75% personal income tax rate, indicates how tax reform is the top priority in Columbus in 2023.
“It’s significant this is called House Bill 1,” says Representative Mathews. “I hope this will pass as a stand alone bill or as part of our budget framework. That will send a message that Ohio is open for business and we want people to move here.”
The 2.75% rate implemented by HB 1 would give Ohio the nation’s second lowest flat tax rate, just behind Arizona’s 2.5% rate that took effect at the beginning of 2023. The move to a 2.75% flat tax in Ohio, under HB 1, would be facilitated in part by scaling back state aid to localities.
The money Ohio state government sends to local governments every year, which would end under HB 1 in order to free up revenue for state income tax relief, subsidizes lower property tax rates than what is needed to fund local government spending. HB 1 proponents point out that the bill pays for state income tax relief by putting an end to state spending that helps local officials conceal the full cost of local government from their constituents.
“We want Ohio to be the leader, the economic engine in the Midwest and the country,” adds Representative Mathews. “We could take the lead now by passing HB 1, which would give Ohio the lowest income tax rate in the Midwest and make us among the most business and family friendly states in the nation.”
Ohio isn’t the only state in the Midwest where legislative leadership has proposed a lower, flatter income tax. Wisconsin Senator Majority Leader Devin LeMahieu has introduced legislation to move Wisconsin from a progressive income tax code with a top rate of 7.65% to a flat tax of 3.25%.
Legislative leadership in Kansas, as is the case in Ohio and Wisconsin, has also introduced bills to move to a flat tax with a lower rate than what is currently assessed. In fact, the Kansas Senate passed legislation this week that would implement a 4.75% flat income tax.
Republicans in the Kansas House of Representatives, meanwhile, have introduced a bill moving the state from a graduated income tax code with rates of 3.1%, 5.2%, and 5.7%, to a flat 5% income tax. Both the House and Senate flat tax proposals would result in a net cut on average for taxpayers of all income levels.
Eric Stafford, vice president of government affairs at the Kansas Chamber of Commerce, says that the flat tax legislation pending in the Kansas House is modeled after the tax reform enacted in North Carolina, which facilitated significant rate reduction by making it contingent upon revenue triggers being met. North Carolinians who seen their multiple rounds of income tax rate-reducing reform frequently compared to what was enacted in Kansas a decade ago, disingenuously so many believe, now get to enjoy vindication and confirmation that, contrary to the narrative published in many media outlets, it is North Carolina and not Kansas that is seen as the model for conservative tax reform. This is evidenced by the fact that Kansas lawmakers are now explicitly following North Carolina’s lead.
“It took courage for the conservative General Assembly in North Carolina to restrain spending and cut taxes,” says Paige Terryberry, senior analyst for fiscal policy at the John Locke Foundation, a Raleigh-based think tank. “North Carolina’s bold reforms are a huge success. It’s exciting to see other states follow suit.”
Aside from Ohio, Wisconsin, and Kansas, there are many other states where rate-reducing tax reform has been introduced and is being debated. Legislation has been filed in the Arkansas Legislature to take their top income tax rate from 4.9% to 4.5%. Montana’s income tax rate is scheduled to fall from 6.75% to 6.5% next year. Legislators in Montana, one of five states with no state sales tax, are now considering a proposal to cut the income tax rate to 5.9% next year instead of 6.5%.
Lawmakers in Iowa, where one of the most significant tax code overhauls has been enacted by Governor Kim Reynolds (R), are considering proposals to implement further rate reduction and possibly phase out the state income tax entirely. In Kentucky, Governor Andy Beshear (D) announced on February 17 that he will sign into law the income tax cut recently passed out of the Kentucky House and Senate, which will reduce the state’s flat income from 4.5% to 4%.
Legislative leadership in both North Carolina, which has a 4.75% flat rate scheduled to fall to 3.99%, and Arizona, which has a 2.5% flat rate, the lowest in the nation, are pursuing further income tax rate reduction this year. As in Iowa, legislation to phase out the state income tax has been filed in Arizona.
It assumed the mantle less than two months ago, but Arizona may not hold the title of nation’s lowest flat tax for much longer. In the past week the North Dakota House passed House Bill 1158, which will move North Dakota to a 1.5% flat income tax, coupled with a relatively generous standard deduction.
North Dakota currently has five income tax brackets with a top rate of 2.9%. The 1.5% flat tax bill passed in the House this week, which is sponsored by Rep. Craig Headland and has been endorsed by Governor Doug Burgum (R), would give North Dakota the nation’s lowest flat tax rate if enacted. This past week the North Dakota House also passed House Bill 1425, legislation that would phase out the state income tax over time time based on revenue triggers, and approved pension reform that will reduce taxpayer costs.
When lawmakers in eight blue states rolled out new proposals to raise taxes in January, Illinois Representative Will Guzzardi (D) said they did so in a coordinated fashion “to send a message that there is nowhere to hide.” As the above rundown proves, not only are there many states where one can avoid the tax hikes recently introduced in Illinois, California, New York, and other blue states, lawmakers in states that have been popular destinations for former blue state residents are now working to make their tax codes even less burdensome and more attractive than they already are.