STATE BALLOT ISSUES – THE GRADUATED INCOME TAX
Council Comments No. 809, October 2, 1968

Proposition No. 1 on the November 5 ballot is a proposed amendment to the state constitution:

“An income tax at flat rates or graduated as to rate or base may be imposed by the state or any of its subdivisions.”

This amendment would replace the present Section 7 of Article IX of the state constitution, which states:

“No income tax graduated as to rate or base shall be imposed by the state or any of its subdivisions.”

History
The present constitutional prohibition against a graduated income tax was incorporated in the constitution of 1963 as an express limitation on the power of the state legislature and political subdivisions of the state to impose a graduated income tax. There had previously been some doubt as to the constitutionality of a graduated income tax under the provisions of the constitution of 1908, although the attorney general had ruled that a graduated income tax would be constitutional.

In 1962, the city of Detroit adopted a flat rate city income tax and in 1964 the state legislature adopted a uniform city income tax act which authorized cities to enact a flat rate city income tax under terms of a uniform ordinance. In 1967, the state legislature enacted a compromise tax package which included a flat rate income tax on individuals (rate of 2.6% on taxable income), corporations (5.6%), and financial institutions (7.0%). As a part of the compromise tax package, the legislature approved the submission to the people of a constitutional amendment that would authorize state and local income taxes graduated as to rate or base.

The Graduated Income Tax
A graduated income tax is one in which the rate varies with the amount of income (graduated rates) or one in which the rate is constant but the base against which it is imposed varies (graduated base). The examples below illustrate the two types of graduation.

The most familiar example of an income tax graduated as to rate is the federal income tax with rates (before the 1968 surtax) ranging from 14 percent on the first $500 of taxable income to 70 percent on taxable income in excess of $100,000. The rate schedule of the Georgia state income tax illustrates a state income tax with graduated rates:

Net IncomeRate
First $1,0001%
$1,001 – $3,0002
$3,001 – $5,0003
$5,001 – $7,0004
$7,001 – 10,0005
Over $10,0006

An income tax graduated as to base is applied at a flat rate to a base that is graduated; e.g., the amount of federal income tax paid. The Alaska state income tax is graduated as to base. The individual taxpayer determines his Alaska state income tax liability by applying a flat rate of 16 percent to the amount of federal income tax that would be payable on his income under the federal tax rates in effect on December 31, 1963.

Since the amount of federal income tax liability is determined by applying graduated rates to taxable income, the net effect of a flat rate state income tax applied to federal income tax liability is the same as imposing a graduated state income tax at rates scaled down from the federal rates.

The rate schedule of an income tax does not, itself, determine the proportionality of progressivity of the tax. A tax is considered to be proportionate if the tax paid as a percentage of income is the same at all income levels, while a tax is considered progressive if the tax paid as a percentage of income increases as the income level increases. The progressivity of a tax is influenced by the amount allowed for personal exemptions, deductions and credits as well as by the rate schedule.


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