Joe Biden’s presidency and the narrow Democratic majorities in Congress have done great damage to the American economy. Republicans have been unable to stop the tax-and-spend tsunami because the Democrats can use the reconciliation process to govern alone with their slim majority.
But all is not lost.
Limited-government activists and elected officials locked out of power in Washington have taken advantage of the genius of the American Constitution: federalism. Despite what’s going on in Washington, the fifty states can change the direction of America by passing legislation in one state, thus encouraging other states to follow suit. Concealed carry laws, welfare reform, right-to-try legislation, term limits: all are examples of laws that began in one state and went “viral.”
Success in one state becomes the model for other states to act on. Success in a growing number of states crushes naysaying arguments that something cannot work or will wreak havoc.
The most revolutionary change in American politics since Biden entered the White House on January 20, 2021, has been the decision by a number of governors and legislators in red states to reduce, flatten, and begin phasing out personal income taxes. This movement is not simply a replay of the tax revolt of 1978, which saw tax limitation measures imposed in many states and led to the Reagan tax cuts of 1981.
Yes, in 2021 red-state lawmakers in fourteen states enacted income tax relief, as did eleven red states in 2022. But, more importantly, many of those states have gone further and announced that their tax-rate cuts are just the first steps on a march toward abolition of their state income taxes.
The benefits of forgoing an income tax are demonstrated by the draw of the eight states that have no personal income tax: Texas, Tennessee, Florida, Washington, Nevada, Alaska, Wyoming, and South Dakota attract jobs, investment, and citizens away from states with state income taxes and have been doing so for decades.
Americans have long voted with their feet in favor of states with a lower tax burden, and this trend has ramped up over the past two years as more state lawmakers have cut and flattened their state’s income tax. The top ten states for inbound migration last year had an average state and local tax burden of 7.7 percent, compared to the 9.9 percent average tax burden of the ten states with the greatest rates of outbound migration.
In addition to having a lower overall tax burden, the states that gained the most people last year also had a lower personal income tax rate on average. The top third of states in terms of population growth from the start of the pandemic (April 2020) through July 2021 had an average combined state and local top marginal income tax rate of 3.5 percent. The bottom third of states for population growth, in contrast, had an average top marginal income tax rate of 7.3 percent.
The states that are attracting the most new residents also levy lower corporate tax rates. The average top corporate tax rate was 4.1 percent in the ten states with the highest inbound migration last year. Meanwhile, the ten states that had the highest rates of outbound migration had an average top corporate tax rate of 8.3 percent.
The Electoral College already has shifted from high-tax states to low-tax states. Every ten years, it becomes more difficult for a liberal Democrat to win the presidency. Thanks to lower taxes, light regulation, school choice, and other policies that have attracted new jobs and residents, Florida, Texas, and other red states will have increased congressional clout and a greater say in shaping the Electoral College for decades to come.
The leaders of more than ten red states have publicly proclaimed their determination to phase out their states’ income taxes. So expect emigration from blue states to red states to increase in numbers and speed.
New Hampshire has billed itself as a “no-income-tax state” despite having a 5 percent tax on dividends and interest. Last year, its Republican governor, Chris Sununu, moved to make that boast a reality by signing legislation to phase that tax to zero over five years and turn the Granite State into the ninth real no-income-tax state.
The model most states are following in phasing out their state income tax is North Carolina. It first thought to “pay for” the elimination of the income tax in large part by expanding the sales tax base to previously untaxed services in 2013. This met strong opposition, particularly from service-industry companies that were previously exempt from the sales tax.
Later that year, North Carolina shifted to using “triggers,” in which the income tax rate was permanently reduced by a set number when tax revenue hit a certain level. More revenue coming in faster brought more rate reduction. When economic growth is faster, the tax rate falls faster. If the economy slows, the tax reduction is delayed.
The success of triggers has made it easier for other states to vote to phase their income taxes to zero.
In Iowa — thanks to the leadership of state Senate majority leader Jack Whitver, state House speaker Pat Grassley, and Governor Kim Reynolds — legislators voted this year to phase down the state’s personal income tax, which currently has a progressive structure and a top rate of 8.53 percent, to a flat 3.9 percent over the next four years. They plan to move it to zero.
Using revenue triggers, lawmakers in Iowa also are reducing their corporate tax rate until it reaches 5.5 percent. Arizona’s personal income tax rate will drop from 4.5 percent to 2.5 percent, thanks to legislation enacted by Governor Doug Ducey, Representative Ben Toma, and Senators J.D. Mesnard, Karen Fann, and Vince Leach.
Americans have long voted with their feet in favor of states with a lower tax burden.
Americans have long voted with their feet in favor of states with a lower tax burden.
In Kentucky, lawmakers led by state Senate president Robert Stivers and House speaker David Osborne passed a bill bringing down the state income tax rate from 5 percent to zero over the next ten to twelve years.
Louisiana legislators passed a bill that could decrease their income tax over the next twelve years. The Democrat governor read the tea leaves and signed the bill.
The Mississippi House, led by Speaker Philip Gunn, voted 97–12 to phase down the state’s 5 percent income tax to zero tax in ten years. Republican governor Tate Reeves prioritized the issue, calling for a phaseout of Mississippi’s state income tax. As Senate leader, Lieutenant Governor Delbert Hosemann stood in the way of income tax abolition but allowed a compromise in the form of a three-year phasedown to 4 percent. GOP leaders in Mississippi remain committed to putting the income tax on the road to zero.
In September, another state, Idaho, joined the flat-tax club. Republican governor Brad Little signed a bill that marks his third income tax cut in two years and moves the state to a flat 5.8 percent.
In North Dakota, state lawmakers may soon follow suit. Republican governor Doug Burgum recently proposed moving North Dakota to a flat tax. Today North Dakota has a five-tier income tax with rates ranging from 1.1 percent to 2.9 percent. Burgum’s proposal moves to a flat 1.5 percent income tax.
Today there are eight states with no state income tax. Nine states have a single-rate tax. Five states have passed laws that will move their income taxes to a single rate. This is important because it is easier to reduce a flat-rate tax — everyone benefits equally and understands that.
Single-rate taxes are difficult to raise for the same reason. Everyone loses. Politicians can’t divide taxpayers and mug them one at a time.
The governors of West Virginia, Oklahoma, and Virginia all have stated their support for eliminating their states’ income taxes. The next governor of Arkansas, Sarah Huckabee Sanders, campaigned on the promise to do the same.
Within the next four years, twenty-four states will have a single-rate tax. For eight states, that single rate is zero. One can imagine that this finally will begin a debate on why we do not have a flat rate nationally. (Steve Forbes and Dick Armey have argued for one for decades but did not have as many examples of state successes to point to.)
How many states could get to zero income tax? Twenty-three states have a Republican trifecta: control of the governorship and full control of the legislature. Seven other states have full GOP control of the legislature but not yet the governorship.
This is good news for those Americans left behind in blue states.
Why? Because blue-state governors have begun to fight back against their more liberal legislatures that are pushing for higher income tax rates. They see their people, income, and investment flowing to red states. Lower state taxes in Texas and Florida will, over time, bring down the tax rates in California and New York.
That is bipartisan compromise we can live with.
Grover Norquist is president of Americans for Tax Reform.