The $4,000 reason Montana needs a flat tax

Montana has already taken important steps toward a lower and simpler income tax. Governor Greg Gianforte and state legislators have reduced the number of brackets from seven to two, lowered the top rate, and expanded the amount of income taxed at 4.7%.

Now is the right time to finish the job. And new research from the Cato Institute provides yet another reason.

Analysts at Cato examined state tax systems between 1980 and 2025 and found that adopting a flat income tax is associated with approximately one percentage point faster growth in both per-capita income and state gross domestic product by the fourth year after reform.

That may sound small, but when it is compounded over several years, it's huge. In fact, if the growth continued over five years, per capita income would be $4,000 higher than it otherwise would have been.

It's a finding that reinforces MSPC economic research showing a 4.7% flat tax would add $525 million to Montana's economy, generate $286 million in additional wages, create 2,400 new jobs and increase every Montanan's after tax income by $642.

We needn't look further than Colorado. It was the first state to replace its graduated income tax with a flat tax, adopting a 5% rate in 1987.

Researchers at Cato compared Colorado with 13 graduated income tax states that had income trends that were similar. Only after the flat tax took effect did Colorado's per-capital income began to pull ahead. A decade after the reform, Colorado's per-capita income was 5% higher than it would have been had the state continued on the same path as the comparison states.

Under both Republican and Democratic leadership, Colorado has since reduced its flat rate further.

International experience offers even more examples. Eight Central and Eastern European countries that adopted flat taxes found that all eight experienced higher GDP per capita following reform, with statistically significant gains in seven.

Montana does not compete for jobs and investment in a vacuum. It competes with neighboring states such as Idaho, Utah, Colorado, Arizona, Wyoming, and Nevada—many of which impose lower flat taxes or no individual income tax at all.

Studies across the political spectrum consistently find high earners, in particular, respond to income tax rates by shifting income, changing investments, or declining to pursue economic opportunities that become less attractive after taxes.

Consider California. It raised its top rate in 2012, and instead of collecting more, 45% of revenue disappeared in the first year and 61% disappeared within two years.

A flat 4.7% rate would send a clear message that Montana intends to compete for families, entrepreneurs, investment, and jobs.

A single rate also has an important political advantage: it is transparent. If lawmakers want to raise a flat tax, they must explain that increase to all taxpayers. Under a graduated system, government can raise one bracket at a time and promise most voters that someone else will pay.

There's historal evidence as well. Colorado, Kentucky, North Carolina and Utah - all states that moved from a graduated to a flat income tax before 2023 - have continued to reduce their flat rates.

Since the announcement of the flat tax effort, opponents have argued that Montana needs a graduated income tax to maintain public services and fiscal stability. But again, the evidence does not support this.

The Cato analysis, in fact, shows the difference in fiscal surpluses of no income tax states, flat income tax states and graduated income tax states.

Income tax structure	Fiscal surplus per taxpayer
No income tax	$2,900
Flat income tax	$1,500
Graduated income tax	$1,400

It goes without saying that tax structure is not the only cause of those differences. But graduated income taxes can also be more volatile because they often rely on capital gains, bonuses, and other income that rises rapidly in good years and falls sharply during downturns.

No single study can prove that a flat tax, by itself, causes every improvement observed in states that adopt one.

But the direction of the evidence is remarkably consistent. Lower and flatter income taxes are associated with faster growth, higher incomes, improved compliance, stronger competitiveness, and greater protection against future tax increases. Those findings align with Montana-specific projections showing substantial gains in economic output, wages, employment, and after-tax income.