States Get Serious About Tax Cuts

Con­gres­sional De­moc­rats are de­bat­ing which taxes to in­crease, while the Biden White House is ne­go­ti­at­ing a world-wide car­tel to limit tax com­pe­ti­tion. But in the 50 states there is a dra­matic in­crease in tax com­pe­ti­tion to pro­vide the best gov­ern­ment at the low­est cost.

Econ­o­mists have long noted the power of in­ter­state tax com­pe­ti­tion for jobs and in­vest­ment. In 2021 the 10 states that gained the most res­i­dents from do­mes­tic in-mi­gra­tion had an av­er­age to­tal state and lo­cal tax bur­den as a per­cent­age of in­come of 7.7%, no­tably lower than the 9.9% of the 10 states that lost the most res­i­dents. In­ter­state mi­gra­tion and tax com­pe­ti­tion are in­creas­ing for four rea­sons:

First, two years of work­ing from home dur­ing Covid taught em­ploy­ees and em­ploy­ers that it isn’t nec­es­sary to live in high-tax states.

Sec­ond, thanks to the lim­its on the de­ductibil­ity of state and lo­cal taxes in the 2017 tax re­form, blue states with high in­come and prop­erty taxes no longer have the cost of their high-tax poli­cies hid­den and sub­si­dized by re­duced fed­eral in­come taxes.

Third, Amer­i­cans have no­ticed that high-tax states don’t pro­vide bet­ter roads, ed­u­ca­tion or other ser­vices. Flor­ida (with 22 mil­lion res­i­dents) has no in­come tax and the state spends half as much as New York (20 mil­lion res­i­dents). New York has a top state in­come tax of 8.82% (soon ris­ing to 10.9%) and was the only state to raise its per­sonal in­come-tax rate dur­ing the pan­demic.

Fourth, state lead­ers have dis­cov­ered that they can re­duce mar­ginal in­come-tax rates by re­ly­ing on trig­gers that per­ma­nently re­duce the state in­come tax when rev­enue rises above a pre­de­ter­mined spend­ing limit. Tax re­duc­tion is en­abled by spend­ing re­straint. North Car­olina pro­vided the best ex­am­ple of this strat­egy over the past seven years.

To­day eight states have no per­sonal in­come tax: Alaska, Flor­ida, Nevada, South Dakota, Ten­nessee, Texas, Wash­ing­ton and Wyoming.

Two more states have al­ready en­acted laws to phase to zero. New Hamp­shire, which never taxed wage in­come, voted in 2021 to phase out its tax on div­i­dends and in­ter­est over five years, un­der the lead­er­ship of Sen­ate Pres­i­dent Chuck Morse. Lou­isiana, un­der the lead­er­ship of Sen­ate Ma­jor­ity Leader Sharon He­witt, has set a path to re­duce its in­come tax every year trig­gers are met. These trig­gers could take Lou­isiana’s in­come tax to zero by 2034, par­tic­u­larly if the Leg­is­la­ture im­ple­ments ad­di­tional rate cuts in com­ing years.

Ten other states have be­gun the march to a zero rate. West Vir­ginia’s Sen­ate, with the en­thu­si­as­tic sup­port of Gov. Jim Jus­tice, has voted to draw down the state in­come tax. So has the state House in North Dakota. Mis­sis­sippi Gov. Tate Reeves was elected in 2019 on a prom­ise to end the in­come tax. In Jan­uary, un­der the lead­er­ship of Speaker Philip Gunn, the Mis­sis­sippi House voted 96-12 to move to zero.

Ari­zona Gov. Doug Ducey was re-elected in 2018 with the stated goal of dri­ving the in­come tax to zero. Last year the Leg­is­la­ture, led by House Ma­jor­ity Leader Ben Toma and Sen. J.D. Mes­nard, passed a phase-down of the per­sonal in­come tax to a flat rate of 2.5% by 2025. Ari­zona Re­pub­li­cans are com­mit­ted to tak­ing the rate to zero.

North Car­olina has been on the path to zero for its in­di­vid­ual and cor­po­rate rates since 2013, when the House and Sen­ate be­gan rev­enue-trig­ger-fa­cil­i­tated tax re­form that per­ma­nently cut the state per­sonal and cor­po­rate in­come tax rates. They started with a top in­di­vid­ual rate of 7.75% and a cor­po­rate rate of 6.9%. Thanks to the lat­est round of tax cuts, the now-flat per­sonal in­come tax will fall to 3.99% by 2027, and the cor­po­rate rate, now 2.5%, will zero out over the next decade.

Wis­con­sin leg­is­la­tors re­cently an­nounced that their goal is to elim­i­nate the state in­come tax. They need a gov­er­nor who would sign such a re­form, which they don’t have but may get af­ter No­vember. “When you look at all the states that are grow­ing right now, they don’t have a state in­come tax,” state Sen. Roger Roth said in Jan­uary af­ter it was an­nounced that the state has a nearly $4 bil­lion sur­plus.

Iowa Gov. Kim Reynolds has a plan to re­duce the per­sonal in­come tax to a flat 4% over four years. Sen­ate Ma­jor­ity Leader Jack Whitver and Sen­ate Ways and Means Chair­man Dan Daw­son have a plan that moves to a flat rate of 3.6% over six years, fol­lowed by a full phase­out.

Ok­la­homa Gov. Kevin Stitt is pro­mot­ing a sig­nif­i­cant in­come-tax re­duc­tion and mak­ing it clear this is step one on a march to zero. In South Car­olina, Gov. Henry Mc­Mas­ter led his 2021 State of the State ad­dress with a com­mit­ment to cut the state in­come tax.

In Ar­kansas for­mer Trump press sec­re­tary Sarah Huck­abee Sanders is the Re­pub­li­can can­di­date for gov­er­nor, run­ning on a prom­ise to end the in­come tax on the heels of a phased re­duc­tion of the in­come tax signed by Gov. Asa Hutchin­son.

Law­mak­ers in Wash­ing­ton could learn from these ex­am­ples. Or to­day’s con­gress­men and sen­a­tors may be re­placed by gov­er­nors and state leg­is­la­tors who have demon­strated what works.


By: Grover Norquist

Mr. Norquist is president of Americans for Tax Reform.