How did Idaho end up with a higher income tax rate than Illinois?

Idaho has spent years building a reputation as a low-tax, pro-growth state—a place where people can work, build businesses, invest and keep more of what they earn.

But today, Idaho holds a distinction that should concern policymakers in Boise: Idaho has the highest flat individual income tax rate in the country.

Idaho’s rate is 5.3 percent.

That is an improvement from where Idaho was just a few years ago, and lawmakers deserve credit for cutting the rate. Idaho’s individual income tax rate was 6.925 percent as recently as 2020. Successive legislatures have reduced that burden substantially.

But economic competition isn’t measured by comparing Idaho today with Idaho five years ago. It is measured by comparing Idaho with the states competing for the same workers, entrepreneurs, businesses and investment.

And on that score, Idaho is falling behind.

Fifteen states have flat individual income taxes. Arizona’s rate is 2.5 percent. Indiana’s is below 3 percent. Louisiana is at 3 percent. Pennsylvania is at 3.07 percent. Kentucky is at 3.5 percent. Iowa is at 3.8 percent.

Then there is Idaho, at 5.3 percent.

Perhaps the most remarkable comparison is Illinois.

Illinois is hardly anyone’s idea of a low-tax, limited-government state. Yet its flat individual income tax rate is 4.95 percent.

Idaho’s is higher.

Think about that: a worker or small-business owner in conservative Idaho faces a higher flat state income tax rate than someone earning the same taxable income in Illinois.

If that doesn’t get the attention of policymakers in Boise, it should.

Of course, a state’s overall tax burden involves much more than a single rate. Illinois has plenty of other taxes, including notoriously high property taxes, and no one should mistake this comparison for an endorsement of Illinois tax policy.

The point is simpler: Idaho should not be satisfied with having a higher flat income tax rate than Illinois—or every other flat-tax state in America.

Taxes on income matter because they are taxes on productive activity.

When people work additional hours, start businesses, make investments or expand existing companies, the income tax reduces the return on that activity. The higher the rate, the greater the penalty on earning additional income.

That matters increasingly because workers and businesses are more mobile than ever.

An entrepreneur considering where to launch a company can compare tax rates across state lines. A business deciding where to expand can do the same. So can a professional deciding whether to take a job in Boise, Salt Lake City, Phoenix or Las Vegas.

Idaho doesn’t compete in a vacuum.

In fact, several of our regional competitors levy no broad-based individual income tax on wages at all. Wyoming and Nevada have no individual income tax. Washington does not currently tax wage income, although it does impose a tax on certain capital gains. A new income tax is scheduled to take effect in 2028 in the Evergreen State, but it's facing a constitutional legal challenge.

Meanwhile, Utah’s flat individual income tax rate is lower than Idaho’s.

For a state that wants to attract investment and remain one of the best places in America to build a business, those comparisons matter.

Idaho has benefited enormously from population and economic growth. But policymakers should not assume that growth will continue automatically.

States compete. For years, many Americans fled high-tax states for places offering lower taxes, less regulation and greater economic opportunity. Other states noticed. Legislatures around the country have been cutting income taxes and adopting reforms designed to make their states more attractive.

That means standing still is effectively falling behind.

Idaho should respond by establishing a clear path toward a lower income tax rate.

That does not mean abandoning fiscal discipline. Idaho should continue balancing its budget, maintaining adequate reserves and ensuring that ongoing spending commitments can be supported by ongoing revenues.

Tax reform and fiscal responsibility are not mutually exclusive. Idaho’s own experience proves it.

One approach would be to establish revenue triggers that automatically reduce the income tax rate when revenues, spending and reserves meet predetermined benchmarks. That would give taxpayers a clear path toward lower rates while protecting the state against irresponsible reductions during economic downturns.

The first goal should be obvious: Idaho should get its income tax rate below 5 percent.

Doing so would at least move Idaho below Illinois and eliminate the distinction of having the highest flat income tax rate in America.

But that should be the beginning, not the end.

Over the longer term, policymakers should ask a more ambitious question: What income tax rate would make Idaho one of the most economically competitive states in the country?

A rate beginning with a “4” would be progress. A rate approaching 3 percent would put Idaho in much stronger company. And policymakers should continue evaluating whether Idaho can responsibly go further.

The objective should not simply be collecting enough revenue to fund whatever government happens to spend. Policymakers should begin with the amount necessary to provide essential services efficiently and then design a tax system that does the least possible damage to economic growth.

Idaho has a tremendous opportunity.

Our state remains attractive to families, entrepreneurs and employers. We have benefited from years of economic and population growth. And Idaho’s strong fiscal position gives policymakers options that many states would envy.

But success can breed complacency.

Idaho cannot simply rely on its reputation as a low-tax state while competitors steadily reduce their rates.

A generation ago, comparing Idaho’s tax rate favorably with states such as California or New York might have been enough. Today, Idaho is competing with Arizona, Utah, Indiana, Iowa, Kentucky and a growing number of states aggressively reforming their tax codes.

And there is one comparison that should be especially difficult for Idaho policymakers to ignore.

Even Illinois has a lower flat income tax rate than Idaho.

Being number one is usually something Idahoans can celebrate. Having America’s highest flat income tax rate isn’t.

The Legislature should make sure Idaho doesn’t hold that title for long.