At the Tax Foundation, Jared Walczak performs a detailed analysis of flat taxes in the fifty states and draws some conclusions about their benefits. Your Survival Guy is a big supporter of America’s small business owners. After reading Walczak’s analysis, all supporters of small businesses should be pushing hard for their states to adopt flat taxation. Walczak concludes his piece by writing:
Of the nine states that already have flat taxes, five enshrine that status in their state constitution, locking in the benefit and making it harder for lawmakers to raise taxes by switching to a progressive tax regime. This is a particularly important protection for small business owners, since about 95 percent of all businesses are pass-through businesses subject to individual, not corporate, income taxes, and the vast majority of pass-through business income is earned by companies exposed to states’ top marginal income tax rates. In Illinois, for instance, where lawmakers championed a failed constitutional amendment to permit a graduated-rate income tax, 93 percent of pass-through business income was on returns with more than $200,000 in adjusted gross income (AGI), and over half of all pass-through business income was reported on returns showing more than $1 million in AGI. Hiking the top marginal rate is not just about the wealthy; it is about the state’s small businesses too, and about providing a greater level of certainty for entrepreneurs making location decisions.
The states now transitioning to flat taxes, and those which have not yet constitutionally protected their current single-rate tax structures, should consider doing so. The following table shows states which currently have, or are on track to implement, a flat tax, with date of implementation (past or future) and whether a single rate tax is constitutionally mandated. Of the five states that have had flat taxes from the start, four enshrine this status in their constitution. Of the four that transitioned, only one does.
14 States Have, Or Are Implementing, Flat Income Taxes State PIT Adopted Flat As Of Constitutional Arizona 1933 2024 Colorado 1937 1987 ✓ Georgia 1929 2024 Idaho 1931 2023 Illinois 1969 Always ✓ Indiana 1965 Always Iowa 1934 2026 Kentucky 1936 2019 Massachusetts 1917 Always ✓ Michigan 1967 Always ✓ Mississippi 1912 2023 North Carolina 1921 2014 Pennsylvania 1971 Always ✓ Utah 1971 2007 Notes: Georgia, Idaho, Iowa, and Mississippi are implementing flat taxes in accordance with legislation enacted this year, while in Arizona, a court has cleared the implementation of a 2021 law. Implementation dates in Arizona and Georgia are contingent on revenue availability.
Sources: State statutes; Tax Foundation research.
States shifted from graduated to single-rate income taxes in 1987, 2007, 2014, and 2019. A recent court decision will allow a 2021 law in Arizona to move forward. With new laws beginning that transition in Arizona, Georgia, Iowa, and Mississippi, 2022 has already seen the enactment or legal clearance of as many new flat taxes as we’ve seen transition in the history of state income taxes to date, and that’s before any action is taken in Missouri and Oklahoma.
Action Line: If you don’t live in a state that has a flat tax, or even treats small businesses like valued parts of society, it may be time to look for a better America. Start your search with my Super States. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter, and I’ll push you to make your America the best it can be for your family.
E.J. Smith - Your Survival Guy
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