How Often Do Graduated and Flat Rate States Change Their Tax Rates?

Abstract

In November 2020, Illinois voters will consider an amendment that would strike the following two sentences from the Illinois constitution. “A tax on or measured by income shall be at a non-graduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes imposed on individuals and one such tax so imposed on corporations.” Striking these two sentences would allow Illinois legislators to impose a graduated rate system, which would allow the tax rate to vary with the income of the tax filer. The Illinois General Assembly passed legislation in May of 2019 that would impose such a graduated rate system beginning in January 2021 should the constitutional amendment pass. The other states did not make changes in their basic tax structure. Table 1 provides some basic data for all states about the number of rate changes. Eight states had a flat rate tax for the entire period, and three states had a flat rate tax for part of the period. In total, we observed 153 cases of annual tax rate dynamics. Similarly, we observed 592 cases of tax rate dynamics in states with graduated rate taxes. In each state, in each year, we checked whether any tax rate changed. As shown in Table 1, out of 153 total cases there were tax rate changes in 27 cases (17.76%) in states witha flat rate tax. In graduated rate states, out of 592 total cases there were tax rate changes in 94 cases (15.85%), which is slightly lower than the frequency of changes in flat rate states. The proposed constitutional amendment on the November 2020 ballot would move Illinois from a flat rate to a graduated rate system which is a change unlike any that a U.S. state has made since at least 2002. The full implications of this change for tax-setting behavior are difficult to predict. However, examination of the recent experience of other U.S. states finds little difference in the frequency of tax rate changes in general, and whether tax rate increases occur in particular, in states with graduated and flat rate tax systems.