When the Washington State Supreme Court issued its March 24 ruling authorizing collection of the capital gains tax signed into law by Governor Jay Insley (D) two years ago, it made Washington the only jurisdiction on the planet to classify a capital gains tax as an excise tax. The decision also took Washington off the list of no-income-tax states.
Washington State’s departure from the club of no-income-tax states comes a little more than four months after Massachusetts was pulled off the list of flat tax states with Bay State voters’ approval of Question 1. Question 1, which garnered 52% of the vote, is a constitutional amendment that moved Massachusetts this year from a flat 5% state income tax to a progressive income tax with a top rate of 9%. Though these developments in Washington and Massachusetts are big wins for progressives, they’re outliers in the overall trend.
Progressive Democrats have won recent income tax battles, major ones, but there is still plenty of evidence they’re losing the overall tax policy debate in state capitals. “At least 24 states are weighing cuts to personal income tax rates this session,” Institute for Taxation and Economic Policy (ITEP) analysts wrote in a January blog post lamenting what they referred to as “tax cut fever” in state capitals, along with the “recent flurry of interest in flat taxes” that ITEP researchers criticized as “misguided and often reckless.”
In fact, more states moved from a progressive to a flat income tax in the last five years than in all previous years combined. Five years ago there were nine flat tax states. Today there are 13. While that number is down from 14 last year, even when factoring in the loss of Massachusetts, the number of flat tax states has increased by more than 44% in just the past five years.
When looking at the size of the no-income-tax club, even with Washington State’s departure, the list of no-income-tax states is up one on net in recent years. That’s because Tennessee lawmakers passed legislation phasing out their investment income tax, which was completed in 2021, bringing the number of no-income-tax states up from seven to eight. New Hampshire is scheduled to follow suit thanks to the budget signed into law by Governor Chris Sununu (R) in 2021, which will phaseout the Granite State’s investment income tax by 2027. As was the case in Tennessee when Volunteer State lawmakers repealed their investment income tax, New Hampshire already avoids taxing wage income. With so many rate-reducing tax reform plans advancing in state capitals right now, the number of no-income-tax and flat tax states is poised to grow even further in the coming years.