By John Hendrickson
A flat tax revolution is sweeping the states. Iowa, Mississippi, Georgia, Arizona, and Idaho have all enacted legislation to move toward a flat income tax rate. “In more than a century of state income taxes, [until these recent changes,] only four states have ever transitioned from a graduated-rate income tax to a flat tax,” notes Jared Walczak, Vice President for State Projects at the Tax Foundation.
Iowa’s tax reform, which the state government enacted this spring, is the most extensive of all recent state-based tax reform measures.
Governor Kim Reynolds and the legislature passed a comprehensive tax reform measure that will phase out the current progressive nine-bracket income tax system and replace it with a flat 3.9 percent rate by 2026. Under the law, the flat rate phases in as follows:
Among states, North Carolina is the gold standard for tax reformers, having successfully reduced both its individual and corporate income tax rates, while keeping government spending in check. North Carolina is also on track to phase out its corporate income tax rate.
However, Iowa is offering North Carolina some competition. Its corporate tax, which currently has a 9.8 percent top rate, will gradually be phased down until it reaches a flat 5.5 percent. “When looking for the state that made the most significant changes to its tax code this year, that award probably goes to Iowa, the other state where lawmakers enacted tax reform in 2022 that moves in the same direction as North Carolina’s reforms,” argues Patrick Gleason, Vice President for State Affairs at Americans for Tax Reform.
Idaho is the most-recent state to pass flat-tax legislation, moving toward a 5.8 percent flat tax. Other states considering reform legislation that could potentially create flat taxes include Missouri, Oklahoma, and North Dakota. In North Dakota, Governor Doug Burgum has proposed moving to a flat income tax rate of 1.5 percent. If enacted, that would be the lowest flat income tax rate in the nation.
Advocates in many states, Iowa included, have the goal of eliminating state income taxes altogether, but a low flat tax has advantages over progressive alternatives. Walczak argues that a flat tax is not beneficial only because it simplifies the tax code, but also because it facilitates governments forecasting revenue and taxpayers estimating their tax liabilities. A flat tax also serves as a “bulwark against unnecessary tax increases, and to provide greater certainty for individual and business taxpayers.”
For these reasons, Governor Reynolds and the legislature have made Iowa a national tax leader with the promise of a stronger economy. On a foundation of prudent budgeting and spending limitations, this historic tax reform has left Iowa’s reserves full, and the Taxpayer Relief Fund estimated to have a $2 billion balance.
Nonetheless, tax reform is far from finished in Iowa. As more states lower rates, tax-policy competition will increase. Iowa cannot be complacent; lawmakers must continue to lower both the individual and corporate income tax rates.