Iowa is likely to join a list of states flattening and reducing their progressive income tax rates. Iowa Gov. Kim Reynolds last week proposed gradually consolidating brackets with an eventual goal of a flat 4% rate by 2026.
That will “help the Hawkeye State keep up amid intensifying Midwest tax competition,” as The Wall Street Journal this put it this week. “To the west, Nebraska cut its top corporate tax rate to 7.25% from 7.81% last year, and to the east, Wisconsin’s Democratic Gov. Tony Evers signed the GOP Legislature’s bill cutting the tax rate on middle incomes to 5.3% from 6.27%,” wrote the Journal.
That’s important because, in the long run, Illinois’ fiscal challenge is all about restoring competitiveness, particularly with its neighbors. Its quality of services and total tax burden must both be made competitive again to stem the death spiral of fewer taxpayers, a shrinking tax base and higher taxes.
In 2020, Illinois voters rejected a referendum that would have eliminated a constitutionally mandated flat tax. Along with accompanying legislation that would have become effective, Illinois’s flat tax of 4.95% would have been replaced by progressively higher rates, resulting in a net tax increase of over $5 billion.
Illinois voters apparently understood that would have backfired and that their lawmakers could not be trusted with more revenue. Even though about 97% of them would not have faced an initial tax increase, they rejected the referendum soundly. It received about 45% “yes” votes and 55% “no” votes.
It’s not just Illinois’s neighboring states that are flattening and reducing income taxes. Earlier this year, Arizona flattened its income tax rate to 2.5%, though there will still be a second bracket on income over $250,000. However, no one will pay a top rate above 4.5%.
Some other states are likely to do the same. Most are flooded with cash with their next budgeting season now approaching, thanks to the unspeakable deluge of federal handouts disguised as pandemic assistance.
Illinois voters aren’t often to be congratulated, but they made the right call by killing the “Fair Tax.” Had they authorized a progressive tax increase, the state would now be facing a still worsening competitive disadvantage and an accelerating death spiral. Phew.