Tax Reform

Idaho Joins Historic 2022 Flat Tax Revolution

Steve Forbes’ Flat Tax Revolution is in full swing in the states. Days ago, Idaho became the latest state to switch from a progressive personal income tax to a flat personal income tax. This makes Idaho the fifth state to join the Flat Tax Revolution this year. It’s also the second time in 2022 that Idaho has taken on tax reform.

In February, the Idaho Legislature passed and Governor Brad Little signed H.B. 436 which lowered the top marginal personal income tax rate to 6% from 6.5% and reduced the number of brackets from five to four.

But the Gem State wasn’t finished. Last week the Idaho Legislature convened for a one-day special session and used a $2 billion surplus to give $500 million back to taxpayers through a tax rebate and provide a $150 million tax cut. Idaho’s four personal income tax brackets were consolidated into a flat rate of 5.8%, which goes into effect in January 2023. Currently, Idaho’s top marginal personal income tax is 6%. 

As Jonathan Williams and I wrote for National Review in July, several states have used budgetary surpluses to join the Flat Tax Revolution in 2022:

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 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.

Also included in H.B. 1 was a business income tax cut. The tax on business income will now be 5.8%, down from 6%, which was the rate set by H.B. 436. Business income taxes are counterproductive to state economic growth. That’s because businesses don’t pay taxes, people pay taxes — whether it’s through costs passed on to consumers, fewer jobs created or lower wages for employees. As job creators leave states like California, Illinois and New York, they will now have more reasons to look to Idaho as a potential new home.

Clearly, Idaho lawmakers and Governor Little understand that standing still on economic policies can lead to a decline in economic competitiveness. Idaho already boasts a ranking of 5th for Economic Outlook in the 2022 edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. These new changes are likely to boost the Gem State’s ranking even further. Idaho’s success in implementing tax reform, which is a sign that free market principles of taxation are alive and well, should be a call to action for other free market states.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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