States' 'flat tax' mania: Better for taxpayers or another gift to billionaires?
- More states are enacting the 'flat tax'
- A single-rate income tax means everyone pays at the same rate
- Critics say it lets the rich of the hook -- again
With President Joe Biden proposing to force billionaires to shoulder higher income tax burdens, more states have been employing a handy old idea to head in the opposite direction.
They have embraced the flat tax or flat-rate tax as a single-tier system is known. It is hailed by many GOP governors and legislatures as a way to promote what they perceive as greater fairness for all taxpayers and to attract business to their states.
At the same time, the flat tax hasn’t lost any of its controversy. The system still prompts an outcry from critics who deride it as a regressive scheme that flies in the face of trying to narrow the income gap.
Enthusiasm for the flat tax built on the American political scene when it became the centerpiece of publishing magnate Steve Forbes’ unsuccessful runs for the Republican presidential nomination in 1996 and 2000. Besides saying the tax would be fairer to all, Forbes vowed that the flat tax would make filing returns to the IRS as simple as mailing in a postcard.
Yet the states that have enacted flat tax rates cross the political divide. They include Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah.
Georgia just joined the movement with its legislature voting for a flat income tax rate of 4.99% by 2029, even though it will cut revenue by $1 billion. Currently, the top rate is 5.75%.
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Supporters in states contemplating a move to flat tax rates picture flat taxes as a way to help them grow, attracting businesses and the affluent who will spend money and support the economy.
Flat tax rates alone aren’t enough for some Republican-led states. They’re employed in conjunction with rate cuts.
Iowa’s Republican Gov. Kim Reynolds signed a bill last month that creates a flat tax rate of 3.9% by 2026. She said the individual income tax rate was 8.98% when she took office, after being elected in 2018.
A $1.1 billion tax cut voted in by the Indiana legislature in March would tie the state for having the lowest flat tax rate on income in the country when fully implemented. It would be 2.9%.
But flat tax rates are holding their own even in states that tend to vote Democratic. Illinois voters, for instance, rejected a 2020 ballot measure to jettison the flat tax in Illinois in favor of a six-tier arrangement.
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What does flat tax mean for taxpayers?
The concept of a single rate would sound appealing to Americans hunched over stacks of tax forms this month ahead of the April 18 federal income-tax filing deadline. Yet the flat tax is not really about making tax filing less complex.
“It has nothing to do with reforming taxes and everything to do with cutting taxes,” said Richard Auxier,senior policy associate for the Urban Brookings Tax Policy Center. He contends that much of the tax cutting is already aimed at wealthier households, not those who need it most.
For Grover Norquist, president of Americans for Tax Reform, the flat tax holds a special allure. Because it’s uniform, it prevents governors or legislators from trying to soak the rich or any other group. It requires that if income taxes need to be raised, they'll be raised on everyone.
Raising taxes on the wealthy – the theory being most people are fine with tax hikes when they aren’t the ones being hit with the increase – is easier than trying to mobilize the electorate for a broad tax increase.
“It treats everyone the same,” Norquist said of the flat tax.
As the head of an organization known for eliciting commitments from officeholders to oppose all tax increases, Norquist said the flat tax is a handy tool for states that are trying to gradually reduce their tax rates with an eye toward abolishing them entirely.
If it were to occur, they would join Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming as states that have no personal income tax.
In contrast to states collapsing their tax tiers, Biden advocates for a different approach when it comes to the mega-rich. In his budget blueprint that he sent to Congress, Biden singled out billionaires as not paying enough in federal income taxes.
Billionaires pay an average of 8% in income taxes, which is about half of what average workers like teachers or firefighters pay, Biden said.
The Economic Policy Institute found that the top 1% of richest Americans take home about 21% of all income.
Rather than announcing a new top tax bracket for the richest Americans, Biden called on them to have to pay a minimum of 20% of their income in taxes every year.
“If you make a billion bucks, great. Just pay your fair share,” Biden added in announcing his proposal.
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Contributing: Associated Press