Competition among the states is intensifying, and the divide between fiscal policy models is becoming unmistakable. While many Republican-led states are reducing tax rates and limiting spending, several progressive “blue” states continue to expand government, often with worsening fiscal results.
Washington State offers a clear example. Since the start of the COVID pandemic, state spending has increased by roughly 60 percent. Despite multiple tax increases, Washington now faces a projected $2.3 billion shortfall. Governor Bob Ferguson has proposed a 9.9 percent wealth tax on incomes over $1 million. According to the Tax Foundation, this would push the state’s combined top income tax rate above 18 percent, and more than 57 percent when federal taxes are included.
Other high-tax states face similar challenges. Rhode Island’s spending has risen more than 50 percent since the pandemic, contributing to a $100 million deficit. Illinois is projected to face a $2.2 billion deficit, while Minnesota confronts a looming $3 billion gap after spending down an $18 billion surplus. These states illustrate a consistent pattern: higher taxes and faster spending growth have not produced stable or sustainable fiscal outcomes.
Meanwhile, a growing number of states are moving in the opposite direction. Iowa Governor Kim Reynolds has long argued that tax rates matter, not just symbolically but in real economic terms.
“They were eating into paychecks, increasing the cost of doing business, and quietly making life more expensive for Iowa families,” Governor Reynolds said of Iowa’s former income tax structure.
In 2025, Mississippi and Oklahoma enacted reforms that will gradually eliminate their income taxes. Ohio joined the flat-tax states and will move to a 2.75 percent flat income tax in 2026. That momentum has carried into this year.
Missouri Governor Mike Kehoe has proposed eliminating the income tax over five years, pairing rate reductions with spending restraint and revenue triggers. Louisiana Governor Jeff Landry has already enacted major reforms, establishing a 3 percent flat income tax and a 5.5 percent flat corporate tax. West Virginia Governor Patrick Morrisey is calling for additional income tax cuts, citing revenues running roughly $128 million above projections and increasing competition from neighboring states.
South Carolina may now be leading the charge. The legislature is advancing a reform that would reduce the state’s top income tax rate from 6 percent to a 1.99 percent flat tax within five years using revenue triggers, with the long-term goal of full elimination. The measure has passed the House and, if approved by the Senate, would head to Governor Henry McMaster, who has said he would sign it.
If enacted, South Carolina would become one of the most competitive tax environments in the region—and potentially surpass North Carolina, depending on future policy decisions there.
The lesson for Iowa and the rest of the country is straightforward. Tax-and-spend models are failing, while disciplined tax reform paired with spending restraint is succeeding. Iowa has already made historic progress with its 3.8 percent flat tax and the creation of the Taxpayer Relief Fund—a model now being studied by other states. But in a competitive landscape, standing still is falling behind.
Continued restraint, responsible use of revenue triggers, and a long-term commitment to income tax elimination should remain core goals if Iowa wants to stay economically competitive.
Print a PDF