The Flat Tax Revolution In State Capitals Is Thriving

Developments in state capitals over the past week indicate the phenomenon dubbed “the flat tax revolution” shows no signs of abating and may even be gaining steam. Take Wisconsin, where legislators held an April 25 hearing on Senate Bill 1, legislation that would move the state from a progressive income tax system with four brackets and a top rate of 7.65%, to a 3.25% flat income tax.

Wisconsin legislators have done much to enact meaningful tax relief that has significantly reduced the state tax burden over the past decade. But the introduction of SB 1, sponsored by Senate Majority Leader Devin LeMahieu (R), shows that legislative leadership in Madison believes that even with all the progress that has been made, there is more work to be done to make the state tax code less burdensome and more competitive. At the April 25 Senate Revenue Committee hearing on SB 1, Leader LeMahieu said that his proposal, if adopted, “will make Wisconsin more competitive, more affordable and stronger.”

As it stands, Wisconsin imposes a higher income tax rate than all neighboring states, including Illinois, which levies a 4.95% flat income tax. Megan Novak, director of Americans for Prosperity’s Wisconsin chapter, pointed out in her testimony to Senate Revenue Committee members that “only nine states in this country have an income tax rate higher than our 7.65% top rate that so many small businesses pay right now.”

By moving to a flat 3.25% income tax, SB 1 would bring Wisconsin’s top income tax rate below those levied in surrounding states. Proponents of SB 1 say it would make Wisconsin more regionally, nationally, and globally competitive, putting the state in a better position to compete for job-creating investment.

“Approximately 95% of Wisconsin businesses are pass-through entities that pay the individual income tax rates,” noted a new report by the Badger Institute, a Wisconsin-based think tank. “A shift to a flat-rate individual income tax would, therefore, also result in a meaningful tax reduction for many businesses, which then should result in lower price growth, higher wage growth, more employment and higher shareholder value.”

The new Badger Institute report, released on April 18, explores the economic effects of moving to a 5.1% flat personal income tax. That report, authored by Don Bruce, an economist at the University of Tennessee, estimates that moving Wisconsin to a such a flat tax could generate almost $7.2 billion in additional economic growth, $614 million in new investment, and add close to 24,000 additional jobs over the next half decade.

While Wisconsin was part of the 22% increase in the number of Right-to-Work states over the past decade, enactment of SB 1 would have Wisconsin become part of another major state policy trend, the aforementioned flat tax revolution. In fact, more states have moved from a progressive to a flat income tax system in the past five years than in all of preceding history. Even with the loss of Massachusetts, where a majority of voters decided in 2022 to go from a flat to a progressive income tax, the number of flat tax states has increased more than 44% over the past half decade, rising from nine to 13. Nearly half of the states now have a flat income tax or no income tax.

The MacIver Institute, a Madison-based think tank, has studied the economic effects of implementing a “systematic glide path to a 3% income tax rate,” finding that such a reform “would give Wisconsin the most competitive income tax among Midwestern states while greatly improving the state’s attractiveness on a national level.”

Opponents of flat taxes often portray them as disproportionately beneficial to upper income households. Wisconsin Senator Chris Larson (D) provided an example of this line of attack in his April 25 tweet calling SB 1 “a bill to give massive tax breaks to the rich.” But the MacIver Institute report found that a 3% flat tax, which is close to the rate implemented under SB 1, “would have a significant impact on the incomes of all Wisconsinites” and “allow working class people to keep more of their income.”

Some Wisconsin lawmakers believe a phased in approach, possibly using revenue triggers, is the best way to implement needed income tax rate reduction. “Spacing out the rate reductions over a number of years protects the state budget from sudden and steep revenue drops,” noted the MacIver report, “giving sufficient time to make gradual adjustments so the transition to the new tax system is smooth.”

Revenue triggers have proven to be a popular and effective mechanism for facilitating income tax rate reduction in a manner that protects against unexpected dips in revenue collections. In Arizona, where the recent installation of a 2.5% income tax, the nations lowest flat rate, was accomplished with the help of revenue triggers, legislators are looking to go farther. Senate Bill 1577, legislation that would continue to phase down Arizona’s income tax rate based on revenue triggers, passed out of the Arizona Senate in February and is awaiting consideration in the House.

Meanwhile in North Carolina, a state where revenue triggers were used to phase the corporate income tax from 6.9% down to 2.5%, lawmakers are in the process of crafting a new budget that will likely include more personal income tax rate reduction. While the North Carolina House has proposed an acceleration of the already-codified phase down of the personal income tax from 4.75% to 3.99%, leadership in the North Carolina Senate introduced legislation to take the rate down to 2.49%.

“Our tax policy has proven successful, and we are excited to build on that success,” North Carolina Senate Majority Leader Paul Newton, who also co-chairs the Finance Committee, said early April. “We believe this tax package will return a significant amount of money to taxpayers while still maintaining the needed revenue to run the state smoothly.”

While enactment of SB 1 in Wisconsin would bring the number of flat tax states up to 14, Kansas lawmakers nearly beat their Badger State counterparts to the punch his week, but came up one vote short. Since the Kansas legislative session began in January, enacting a flat tax has been the number one priority for Senate President Ty Masterson (R) and other members of leadership in both chambers of the state legislature. The original version of Senate Bill 169, which passed out of the Senate in late February, provided for a 4.75% flat tax.

Although the Kansas House countered with a 5.25% rate, the bill quickly evolved into a much broader package, providing for a 5.15% flat rate and a bevy of additional tax relief components. Among other provisions, the final bill included a reduction in the corporate tax rate from 4% to 3%, expanded exemptions for both state property tax and Social Security income tax, and an accelerated phaseout of the state sales tax on food, which was the centerpiece of Governor Laura Kelly’s (D) ‘Axing Your Taxes’ plan that she championed during last year’s reelection campaign.

On April 24, Governor Kelly announced her veto of SB 169, which was approved by both chambers to the Kansas Legislature in early April. In explaining her veto of SB 169, Governor Kelly criticized a different tax bill, one enacted by her predecessor more than a decade ago, which was subsequently repealed.

“Under the Brownback administration, our public schools were shortchanged time and time again,” Governor Kelly said. “The Brownback tax experiment was a failed experiment.”

Senate President Masterson called the veto and counter offer a “gimmicky proposal” that “reveals a stark truth.” The Governor, said Masterson, “believes that taxpayer money belongs to the government, for politicians to dole out in one-time ‘payments’ rather than recognizing the money we collect belongs to the people and that we should simply let them keep it.”

Governor Kelly’s veto did not extinguish hopes for passing a flat income tax in Kansas this year. Legislators in Topeka subsequently worked to whip the two-thirds majority of the House and Senate that’s necessary for a veto override. But that effort fell short by the slimmest of margins on Wednesday, April 26, when the Kansas Senate voted 26-14 in favor of a veto override, which was one vote shy of the two-thirds supermajority needed for the flat tax to take effect.

The flat tax package garnered a veto-proof majority when it originally passed the Kansas House of Representatives, including support from Representative Marvin Robinson (D). During this week’s override attempt, however, two Republican senators broke ranks and voted with Democrats to uphold Kelly’s veto.

Still, the vote to override the Governor and enact the flat tax would have prevailed had it not been for the unexpected opposition of longtime conservative Senator Dennis Pyle (I), who previously voted twice in favor of the original bill. In an unexpected turn of events Senator Pyle, who billed himself as the “only true conservative” in last year’s gubernatorial race, cast the deciding vote against an income tax cut that would’ve saved households half a billion dollars every year while making Kansas the twenty-third state to tax everyone at an equal rate.

The override vote failure in Kansas is a setback for proponents of rate-reducing and flattening tax reform. So too was the 2022 vote in Massachusetts to adopt a progressive income tax, along with the March Washington State Supreme Court ruling that upheld the capital gains tax signed into law by Governor Jay Inslee (D) in 2021.

Yet these recent developments have been outliers in the overall trend over the past decade. Even with the recent high profile defeats in Kansas, Massachusetts, and Washington, the number of flat tax states has still risen more than 44% in the past five years and the number of no-income-tax states is up more than 28%, having grown from seven to nine over the past half decade. Likewise, while the repeal of Right-to-Work in Michigan was a big defeat for Right-to-Work proponents, overall they’re winning, with the past decade featuring an 18% increase in the ranks of Right-to-Work states, rising from 22 to 26 states.

The day after rate-reducing tax reform was defeated in Kansas this week, North Dakota Governor Doug Burgum (R) signed into law House Bill 1158, enacting the largest tax cut in state history. The tax relief package signed by Governor Burgum, which was sponsored by Representative Craig Headland (R), moves North Dakota from a progressive income tax system with five brackets and a top rate of 2.9%, to a two bracket system with rates of 1.95% and 2.5%. Income below $44,725 for single filers and $74,750 for married couples will not be taxed, which results in three out of five income tax filers having no state income tax obligation. HB 1158 also provides property tax relief in the form of a expanded homestead and property tax credits.

Governor Burgum indicated he does not view HB 1158 as the end of tax reform and that an even lower, flatter income tax could likely be on the agenda in future legislative sessions. “While this isn’t the flat tax we originally proposed,” Governor Burgum said on April 27, “North Dakota will still be able to claim the lowest income tax rates in the nation among states that have individual income tax, helping us to recruit and retain workers to address our workforce challenges.”

The reform enacted in North Dakota this week, the day after the failed veto override in Kansas, is indicative of the broader trend and fact pattern in state capitals, which finds that legislators pursuing rate-reducing tax reform are winning more than they are losing.