With the action taken at Thursday’s special session of the Idaho legislature, the Gem State has joined a growing list of states that have adopted lower, flat income taxes. Governor Brad Little signed the flat tax into law on Thursday evening.
The votes in both chambers were overwhelming. Lawmakers not only flattened the income tax to 5.8%, but also provided tax rebate checks for Idahoans and increased education spending in the state by more than $410 million.
There will be plenty of debate about whether the increased education funding will truly increase student outcomes. Policymakers should tie spending on education to performance outcomes, instead of a blind concern about national rankings regarding spending per student.
And there were concerns about the process – including the fact that notifications to the public about public hearings were limited.
But it’s also important to highlight the positive about what was accomplished with the 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.
As we noted on Wednesday, the flattening of the income tax is the most important and underreported issue to come out of the special session.
Moving away from graduated income taxes will help improve Idaho’s competitiveness and reduce revenue volatility. As noted by the state’s recent credit rating from Fitch (emphasis added):
“Idaho's revenues, largely individual income and sales taxes, are economically sensitive, particularly income taxes…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 – and Idaho has done that with the approval of this bill. At least 10 other states have reduced or flattened their personal income taxes in 2022, and many more did so in 2021. Idaho’s 5.8% rate, however, is still relatively high.
Newest Flat State Income Tax Rates
Idaho – 5.8%
Iowa – 3.9%
Arizona – 2.5%
Mississippi – 4.0% (by 2026)
Georgia – 4.9% (scheduled phase in)
With record revenue on the horizon, policymakers should continue to look for ways to lower the income tax rate. But today, Idaho lawmakers and the governor deserve credit for helping Idaho families and businesses, and keeping the state competitive.