While the Wall Street Journal has been complaining (without cause) about Maryland's recent tax on millionaires, they neglected to mention what has happened to states who actually took their advice and implemented flat tax reforms. According to the editorial board of the WSJ, raising rates on top earners should cause them to flee the state in search of lower taxes, while instituting low and flat taxes should attract those same taxpayers. It seems recent developments in Utah have shown that this is simply not the case.
Last year, Utah replaced its dual income tax system with a five percent flat rate. Earlier this week, Utah legislators were informed that the state is in rough fiscal waters, according to a revenue update by the Tax Commission. Although almost all sources of tax revenue are down in the beehive state, the number one culprit is the state's income tax revenues, which have fallen nearly $300 million (to date).
According to Pat Jones, the senate minority leader, had the state not lowered its income tax rates to five percent, and not reduced certain sales taxes, Utah would have gained $360 million in revenue.
Meanwhile, education funds (whose primary source is income tax revenues) and general funds are collapsing. As the recession pushes states further and further into the red, key social services are being cut to bare bones so that middle- and low-income families bear the burden.