Cutting tax rates reduces tax avoidance and tax evasion.
By David R. Henderson
I’ve reported before on TaxBytes on the mainly good news about state income tax rates. In the last few years, many state governments have reduced income tax rates and flattened the income tax structure while only a few states have gone the other way. The progress since I last reported has continued.
The state governments of Arkansas, Indiana, Michigan, Mississippi, Nebraska, North Dakota, and West Virginia have cut state income tax rates. Even Connecticut, whose Democratic governor, Ned Lamont, had to deal with a Democrat legislature, succeeded, with Republican support, in cutting all income tax rates except for the top rate paid by the highest-income people.
All of this matters for three reasons.
First, as a moral matter, it’s important that people are able to keep more of their income. It’s theirs.
Second, even if cuts in tax rates cause state government revenue to be lower than otherwise, that will somewhat constrain the future growth in government spending. The reason is that, unlike the federal government, state governments can’t print money and almost all have some degree of a balanced-budget requirement.
Third, high income tax rates distort the economy, causing people to engage in tax avoidance (which is legal) and tax evasion (which is illegal.) Tax avoidance means not only aggressively finding legitimate deductions when you do your taxes; it also includes working less and making less money. Cutting tax rates reduces tax avoidance and tax evasion.
Here are the details:
- In Arkansas, the top marginal income tax rate is now 4.7 percent, down from 4.9 percent, after it fell from 5.5 to 4.9 percent in 2022.
- In 2024, Indiana’s government, which has a flat tax rate, will reduce the income tax rate from 3.23 percent to 2.9 percent by 2027.
- Nebraska’s government will drop the top income tax rate from 6.64 percent to 3.99 percent by 2027.
- On April 28, North Dakota Governor (and now GOP presidential candidate) Doug Burgum signed a law that cuts the top income tax rate from 2.9 percent to 2.5 percent and cuts the other lower rates also.
- With a bill passed in March, West Virginia’s government cut the top marginal income rate from 6.5 percent to 5.12 percent and cut the lower tax rates across the board.
- As noted above, even Connecticut’s Democratic governor cut tax rates somewhat. He and the legislature cut the lowest tax rate from 3 percent to 2 percent and the next lowest tax rate from 5 percent to 4.5 percent. Unfortunately, he left higher tax rates intact, including the top marginal tax rate of 6.99 percent. Still, that’s some progress.
