Idaho joins the flat tax revolution, but work remains to get income tax rate lower

It is the biggest story to come out of the recent special session of the Idaho legislature. But it’s also the one that got little attention.

For the moment, set aside the arguments about the education spending increase, or the tax rebates, or the complaints about transparency. Those are all real concerns. Major tax and spending policy decisions should not be made in less than 24 hours. There will be plenty of debate about those agenda items in the coming months.

Instead, let’s concentrate on a piece of good news — Idaho joined the revolution. It’s a peaceful one, more about taxes and budget discipline than anything else.

The Gem State has joined a growing list of states that have adopted lower, flat income taxes. Gov. Brad Little signed the 5.8% flat tax into law on Sept. 1, following overwhelming votes in both chambers during the special session.

The benefits are enormous, but the work remains.

Thanks to the adoption of the new flat tax, Idaho’s revenue sources have now become more predictable, Idaho’s working families will benefit, and Idaho has sent a message to the nation that it remains open for business.

Moving away from graduated income taxes will help improve Idaho’s competitiveness and reduce revenue volatility. As the credit agency Fitch noted, “Idaho’s revenues are derived primarily from individual income tax, accounting for nearly half of general fund receipts, and sales taxes, making up about 40%. Tax revenue performance is sensitive to changes in the economy, particularly the component of individual income tax derived from non-withholding.”

It’s also important to stay competitive. At least 10 other states have reduced or flattened their personal income taxes in 2022, and many more did so in 2021.

Even with the reduction to 5.8%, among the flat income tax states, Idaho’s rate is one of the highest. Iowa recently lowered its income tax to 3.9%. Arizona lowered its flat rate to just 2.5%. Mississippi (4%) and Georgia (4.9%) are headed for rate reductions, as well.

The effort to move Idaho to a flat income tax is welcome news. But legislators still have work to do to make sure Idaho’s tax competitiveness remains.

With record revenue on the horizon, policymakers can and should continue to look for ways to lower the income tax rate. One way this can be done is to adopt revenue growth triggers that would allow the state to eventually phase out the income tax entirely.

In other words, if the state achieves a certain level of revenue growth each year, the income tax rate would decline. This kind of pro-growth policy allows the state to give back to families and businesses that are contributing to its growth. It also makes the state more attractive to families and businesses over time.

Idaho has taken the first big step with its new flat tax. Now it’s time to sprint to the finish.