A decade-long push by Koch’s political and policy network to get more states to flatten or abolish income taxes is finally beginning to pay off, thanks to billions in federal Covid relief funds flowing to the states.
Since the beginning of 2021, Arizona, Georgia, Idaho, Iowa, and Mississippi have all begun the process of switching from a graduated to a flat tax so that all earners in those states will be taxed at the same rate, regardless of their income. Flat tax proposals are also gaining legislative momentum in Kansas, Missouri, Ohio, and Wisconsin.
The conservative Tax Foundation calls it a “flat tax revolution,” noting that prior to the pandemic only four states had shifted from a progressive to a flat income tax in the past century.
As it stands now, the majority of states still collect income taxes using a graduated system of tax brackets that requires those with higher earnings to pay a higher percentage of their income in taxes. Nine states have no income taxes for residents, while 13 others impose a flat tax on income or are in the process of shifting to a flat tax. Several other states, like Alabama, Missouri, and Oklahoma, have top tax brackets that kick in at $10,000 or less, effectively making them flat-tax states as well.
Flat Tax Winners and Losers
Switching to a flat tax results in tax cuts for the wealthy and some corporations—like Koch Industries—and effectively raises taxes for moderate and low-income residents by increasing a state’s reliance on regressive sales and excise taxes.
For example, since lower-income residents pay the same rate of sales taxes as wealthier people, a family living at the poverty level needs to shell out the same 29¢ a gallon (or more, depending on the state) on gas taxes as the household that earns $1 million a year.
“Most taxes levied by state and local governments are regressive, meaning that they charge higher rates, relative to income, for low- and middle-income taxpayers than for wealthy families,” notes the nonpartisan Institute on Taxation and Economic Policy (ITEP). Graduated brackets that require higher-income earners to pay a greater percentage of their income is a means of counterbalancing the preponderance of regressive state and local taxes.
ITEP warns that since the current system is already regressive, the flat tax approach hits the poorest hardest. “On average, the lowest-income 20% of taxpayers face a state and local tax rate more than 50% higher than the top 1% of households,” according to the latest edition of the ITEP report Who Pays: A Distributional Analysis of the Tax Systems in All 50 States. “The nationwide average effective state and local tax rate is 11.4% for the lowest-income… individuals and families, 9.9% for the middle…, and 7.4% for the top 1%.”
Wealthy residents and some corporations clearly come out as big winners in states with a flat tax.
“Very large companies like Koch Industries, Publix Supermarkets, Fidelity Investments, and countless law firms, lobbying shops, and real estate firms are organized as S corporations or partnerships and see their profits taxed under the personal income tax code,” according to ITEP.
It’s no surprise, then, that the primary players in the push for flat taxes are Koch’s astroturf lobbying group Americans for Prosperity (AFP)—which calls progressive income taxes “bad policy from a moral perspective”—along with the Koch-backed American Legislative Exchange Council (ALEC) and their allies in the right-wing State Policy Network (SPN).
ALEC adopted a model flat tax bill in 2013, and another in 2017, and has been campaigning for lower state taxes for the past decade. But, with the exception of adoption of a flat tax by North Carolina in 2014 and Kentucky in 2017, its model bill largely failed to get traction—until the pandemic.
Growing Trend Toward Lowering State Income Taxes
The Covid-19 pandemic radically altered the political landscape for Koch’s flat tax policies. Initially, the CARES Act, passed by Congress in March 2020 and signed into law by former President Trump, provided $340 billion in relief funds for state and local governments, with the Coronavirus State and Local Fiscal Recovery Funds included in the 2021 American Rescue Plan adding another $150 billion.
Congress added a provision to the American Rescue Plan that prohibits states from using the federal funds to reduce state taxes, but Republicans had other ideas. Within weeks, Republican attorneys general filed several lawsuits seeking to block that restriction on the grounds that it violates the Constitution’s Spending Clause. In November 2022, the U.S. Court of Appeals for the Sixth Circuit upheld injunctions against the provision in two cases. The Supreme Court declined to hear an appeal in one of those cases, and the other appeal is still pending.
The Republican Attorneys General Association, which coordinates multi-state legal actions by its members, counts Koch Industries among its top donors.
Meanwhile, Republican governors moved quickly to reduce a variety of state taxes. Overall, 16 states have reduced individual income and corporate tax rates since 2021, and four states—Idaho, Iowa, Nebraska, and Utah—have lowered both rates. Kentucky and Indiana are implementing plans to further cut their existing flat taxes, with Indiana on track to cut its individual income tax rate to 2.9% by 2027. Kentucky’s legislature continues to be so enamored of flat tax rate cuts that the state could end up becoming the first new one to fully abolish income taxes in more than 40 years.
In Wisconsin, AFP is pushing a flat tax this legislative session, a proposal that Democratic Governor Tony Evers promises to veto. Senate Bill 1 would phase out the state’s four graduated tax brackets over the next few years, eliminating the highest tax bracket of 7.65% so that by 2026 all earners pay a flat income tax rate of 3.25%. Eleven of the bill’s sponsors are affiliated with ALEC, according to tracking by the Center for Media and Democracy (CMD).
In some cases, the movement toward flat taxes has morphed into calls by ALEC legislators for the complete elimination of individual state income taxes. Since Mississippi’s legislature passed a flat tax in 2022, it has been debating total elimination of the income tax thanks to a proposal sponsored by House Speaker Philip Gunn (R), who was ALEC’s 2020 national chair and still sits on the group’s board of directors.
In Ohio, which is considering completely phasing out its individual income tax over the course of the next decade, AFP released a study claiming that doing so would increase the state’s GDP by an additional $10 billion by 2030. The study makes a number of hypothetical assumptions, including that the state would benefit from a marked influx of businesses that would relocate to Ohio if it had no income tax.
SPN Makes Inroads
ALEC and AFP are not the only Koch-funded groups campaigning for flat taxes. Of the 64 SPN affiliates in all 50 states, most advocate for individual income tax policy changes that favor the wealthy.
In Arizona, the local SPN affiliate, the Goldwater Institute, takes credit for the 2021 passage of a flat tax bill there. It also helped defeat Proposition 208, which proposed a special tax on households earning $250,000 or more to help pay for public school teachers’ salaries.
Although Arizona residents voted in favor of the proposition in 2020, the Goldwater Institute successfully intervened, arguing before the Arizona Supreme Court that the ballot initiative process should not be used to determine budget policy.
Like many other SPN groups, Goldwater has received substantial funding from the Koch network, including $1.2 million (2016–21) from Stand Together Fellowships; $238,353 (2004–20) from the Charles Koch Foundation; and $3.6 million (2010–21) from DonorsTrust, the Koch political network’s preferred dark money conduit.
In Mississippi, the SPN affiliated Mississippi Center for Public Policy is pushing to eliminate the state income tax, claiming that doing so “would leave Mississippi workers with more money each month to spend on themselves and their families” and would make the state “competitive” with other southern states “like Tennessee and Texas” that have no income tax.
Like Goldwater, the Mississippi Center receives support from Koch funding vehicles, including $260,000 (2018–20) from the Charles Koch Foundation; $190,000 (2021) from Stand Together Fellowships; and $132,900 (2018–21) from DonorsTrust.