A Great Income Tax Divorce Is Underway, And It’s A Beautiful Thing

The Wall Street Journal recently reported on the growing divide between blue and red states when it comes to income taxes. What it failed to mention is that this shows the genius of the nation’s founders.

“Republican-led states are racing each other to flatten, cut, and eliminate individual income taxes, with 23 states lowering their top income-tax rates since 2021,” Richard Rubin and  Jeanne Whalen write.

And, indeed, this year, nine states – all Republican – either cut their top marginal tax rate or lowered their flat tax rate. Ohio became the 14th state to adopt a flat tax.

“Democratic-controlled states are moving the opposite way,” notes the Journal, “pushing to increase taxes on top earners to combat inequality and plug budget holes expected from Republicans’ cuts to federal health and nutrition assistance programs.”

(We will leave aside the fact that these reporters fail to explain why only Democratic states are expecting “budget holes” caused by supposed federal spending cuts. The truth is that these states have been spending like there’s no tomorrow.)

Related: “The Great Divorce Continues“

Washington state is one of those tax-hiking states. Lawmakers approved a bill that will start taxing income for the first time – but only incomes above $1 million (see “The Middle Class Will Pay For Washington’s ‘Millionaire Tax’”). California could very well impose a retroactive 5% wealth tax. New York City’s socialist mayor is trying to force the state to raise its top rate. Virginia, Michigan, and Rhode Island Democrats want to raise their top rates

The Journal notes that the number of states with top rates below 5% and above 10% have both been increasing.

“The middle ground is quickly disappearing.”

So how is this a good thing? After all, we’ve written many times in this space about the folly of playing the “tax the rich” game.

It’s good news because this is exactly how our system of government is supposed to work. States are free to experiment with their taxing, spending, and regulating policies – and suffer the consequences.

And that’s just what we’ve been seeing. Millions of middle-class Americans are voting with their feet – leaving high-tax “progressive” states for those that keep their government spending in check, regulations to a minimum, and their taxes low.

California, New York, Massachusetts, Illinois, Maryland, Washington, and Oregon are all losing population to states such as Arizona, Texas, Florida, North Carolina, South Carolina, and Tennessee. These refugees are taking their tax dollars with them, as the two charts, courtesy of Unleash Prosperity, show.

You’d think this would wake up leaders in those blue states. But no.

Instead of calling for tax cuts, New York Gov. Kathy Hochul was recently seen begging rich ex-New Yorkers to come back to the Empire State, do their patriotic duty, and “support the generous social programs that we want to have in our state.”

“We are in competition with other states that have less of a tax burden on their corporations and their individuals,” she said.

The left hates this kind of competition because they fear it will lead to a smaller, less intrusive government. That’s why they call it a “race to the bottom.” It’s why they want a powerful central government free of constitutional limits. It’s why they constantly push for federal rules and regulations that supersede what states can do.

When billionaires started fleeing California at the prospect of an unprecedented, retroactive wealth tax, California Rep. Ro Khanna teamed up with socialist Sen. Bernie Sanders to propose taking the wealth tax national, so it would be harder to avoid.

For the republic to survive and thrive, we need more competition among states, not less. We should drastically cut the size and scope of the federal government and shift the burden of taxing and spending back to the states.

This would free them up to conduct even bolder experiments in how they tax, spend, and regulate.  

–  Written by the I&I Editorial Board