On February 27th, before the 0.10% state income tax cut had even passed the House, the Salt Lake Tribune said, “The Legislature is on the verge of dropping Utah’s income tax rate from 4.65% to 4.55%, meaning those Utahns with the highest incomes will benefit the most.” Well, duh. Such is the nature of a flat tax. But with clickbait headlines like that, and a proposal to reintroduce a graduated income tax rate by Democrat candidate for Governor, Representative Brian King in Utah, perhaps it’s worth assessing the merits of a flat tax rate and why many states are moving in the direction Utah moved more than 15 years ago.
Utah, which implemented a flat tax in 2007, is one of 12 states with this structure, and this is a major reason that Utah has ranked #1 in ALEC’s economic outlook for the last 16 years. Between 2021 and 2022, five states adopted a flat tax, which has led to Utah’s #1 spot being threatened. It’s clear that implementing a flat income tax rate has been the “state tax trend” over the last few years.
Flat tax rates allow the state to better forecast revenues, and for a state like Utah which is constitutionally required to have a balanced budget, the reliability of forecasting numbers is essential for planning and managing appropriation requests. Similarly, flat tax rates help families estimate their tax liability and budget accordingly, since shifts in their income level within a tax year will not push them to different brackets. The flat tax system also creates consistency and predictability for businesses even as their revenues fluctuate.
Flat taxes tend to lead to lower tax rates. The Tax Foundation notes, “Notably, all four states (Arizona, Idaho, Kentucky, Mississippi) that transitioned from a graduated-rate to a single-rate individual income tax before 2023 now have flat rates that are all between 0.5 and 1.05 percentage points lower than they were when the transition to a flat tax first occurred”. When everyone is equally affected by the rate, there appears to be less appetite to increase the rate, and more widespread satisfaction when the rate is lowered. Lower income tax rates inevitably bring with them more business, more growth and more opportunity.
This is where opponents – like the Salt Lake Tribune – will argue that flat taxes benefit the wealthy. That should come as no surprise, since the top income earners (which includes small businesses) in Utah pay virtually all of the state income tax. Consequently, when the rate is lowered, they save the most money. But whether under a flat tax system or a graduated tax system, top earners pay more money in income tax. And top earners absolutely pay their fair share. It is true: under a flat tax system any change in income tax rate – whether up or down – will have the most dramatic impact on those with the largest taxable income. But is that such a bad thing? Tax relief can be distributed to lower earners in different ways than a lower rate – and perhaps in a more effective way, too. Increasing the personal exemption and having it phase out at a certain income level disproportionately benefits lower earners, for example.
While, yes, the newly-lowered income tax rate will save the highest earners the most dollars, a flat income tax rate provides consistency, predictability and generally lower taxes. It also provides ideal conditions for growth and prosperity – and Utah is both growing and prosperous. That is a much better story than the tired argument that the rich are better off than the rest of us.