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There is a recent increase in states replacing the income tax with a flat tax, charging the same rate to all residents, regardless of income.
In the past 100 years, only four states have changed from flat to flat taxes, according to the Tax Foundation. Three other states – Iowa, Mississippi and Georgia – passed legislation to make the change this year.
Arizona cleared the way after a recent court decision, and Oklahoma is looking at the move to join nine other states.
These changes come as part of a wave of government power generated by the surplus. Thanks to better-than-expected revenues and billions in federal support, the hurricane is expected to continue through 2022, according to the National Association of State Budget Officers.
“The state is flush with money,” said Jared Walczak, vice president of government projects at the Tax Foundation. “They see revenue growth and there’s an opportunity for tax reform.”
Many politicians favor an income tax because they see it as simpler, more competitive and harder to change, he said. It is more difficult to raise the single tax rate than the graduated rate because it affects all and not a specific part of the taxpayers.
Walczak said the decision is especially important for small businesses. Owners often have so-called pass-through income, with income on their individual tax returns, and may have a large portion of their income below the top marginal rate.
“With the amount of revenue that politicians now see in their projections, many see this as a good time to enact the tax reform they may have wanted for years,” said he.
Although states such as Alabama, Idaho and Missouri have not yet introduced income taxes, future laws may be easier with lower income thresholds to reach higher rates. , said Walczak. For example, in Alabama, the top rate of 5% kicks in when income exceeds $3,000.
However, critics say that the flat tax benefit favors the wealthiest and could create future revenue challenges.
“It’s not about simplicity,” said Richard Auxier, senior policy fellow at the Urban-Brookings Tax Policy Center. “It’s about tax relief for high-income households.
A flat tax can have a long-term impact on government revenue, especially in a shaky economy, he said. Revenues in 2022 may be weaker than expected and some forecasts predict a bleak outlook for 2023, according to the Tax Policy Center.
The period of inflation, possible changes in monetary policy, the war in Ukraine and other factors may have a “very negative impact” on future government revenues, said Auxier.
“When you create this very low tax, you tie the hands of your revenue system,” he said, explaining that it can be difficult to recoup the money lost during a recession.