State and local governments raise revenue in three primary ways: property, sales, and income taxes. Property and sales taxes tend to impose a higher burden on low-income households. To ensure the fairness and progressivity of their overall revenue system, states need their in-come tax to be sufficiently progressive.
Four states face an apparently insurmountable barrier to progressive income taxation: their state constitutions mandate that any income tax must have a flat rate, applicable to all taxpayers. Without a constitutional amendment, a difficult process, they cannot adopt marginal rates that increase as income increases.
While the impediment appears insurmountable, however, it can in fact be overcome. Moreover, it may lead these states to adopt a more-progressive income tax. Through the use of a flat-rate income tax with a refundable tax credit—called a “demogrant”—states can enact a flat-rate income tax that is simultaneously remarkably progressive and is more economically efficient than an income tax with progressive marginal rates.
This type of flat-rate tax with a demogrant should meet the constitutional requirements of states with mandatory flat-rate taxes. But it does not need to be limited to those states; while legislative inertia prevents most states from shifting to a flat-rate tax with a demogrant, the successful adoption of such a tax by a constitutionally-constrained state may encourage other states without constitutional constraints to consider this more efficient model of progressive income taxation.
Samuel D. Brunson, Bargain Basement Progressivity? Constitutional Flat Taxes, Demogrants, and Progressive Income Taxation, 53 LOY. U. CHI. L.J. 683 (2022).