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Critics call the transition of states to a single income tax a boon for the rich

Critics call the transition of states to a single income tax a boon for the rich

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Recently, there has been a rise in the states, which is replacing the multilevel income tax with a fixed tax, levying the same rate for all residents, regardless of wages.

In the last 100 years, only four states have switched from lower rates to flat taxes, according to the tax fund. Three more states – Iowa, Mississippi and Georgia – have passed a law to make the shift this year.

Arizona has cleared the way after a recent court ruling, and Oklahoma is looking forward to joining nine other flat-tax states.

These changes occur against the background of a a wave of tax cuts at the state level caused by a budget surplus. Fueled by better-than-expected revenues, and billions of federal supportThe surplus is expected to continue in fiscal year 2022, reports National Association of State Budget Employees.

“The states are full of cash,” said Jared Walczak, vice president of state projects for the Tax Fund. “They have seen that revenues continue to grow and there is room for tax reform.”

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Many politicians are in favor of fixed income taxes because they see them as simpler, more competitive and harder to change, he said. It is more difficult to raise the single tax rate than the received rate, because it affects everyone, not individual layers of taxpayers.

Walczak said that this decision is especially relevant for small businesses. Owners often have so-called transitional income, with income passed into their individual tax returns, and can have most of their income subject to the highest marginal rate.

“Given the amount of income that politicians see in their forecasts now, many see it as a good opportunity to adopt the flat tax reforms they may have wanted for years,” he said.

It’s not easy. We are talking about tax breaks for higher income households

Richard Axie

senior political officer at the Urban-Brookings Center for Tax Policy

While states such as Alabama, Idaho and Missouri have not yet offered a flat tax, future legislation could be easier with relatively low income thresholds to reach the maximum rate, Walczak said. For example, in Alabama, a maximum rate of 5% occurs when profits exceed $ 3,000.

However, critics say the benefits of a fixed tax primarily help the rich and could create income problems in the future.

“It’s not about simplicity,” said Richard Axier, senior political officer at the Urban-Brookings Center for Tax Policy. “It’s about tax breaks for higher-income households.”

According to him, a flat tax can have a long-term negative impact on government revenues, especially in a volatile economy. Revenues in fiscal year 2022 may be weaker than expected, and some forecasters predict gloomier forecasts for 2023, according to Center for Tax Policy.

The period of inflation, possible changes in monetary policy, the war in Ukraine and other factors may have a “really negative impact” on future revenues from state taxes, said Axie.

“If you create this really low flat tax, you tie your hands to your income system,” he said, explaining that it can be difficult to regain lost income during an economic downturn.

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