The Count of States Implementing Flat or No Income Tax Increases as 2025 Approaches
The number of states implementing a flat rate income tax has increased by more than 50% within the past decade, growing from nine in 2013 to 14 in 2024. On New Year's Day 2025, this trend continues as two more states join the list.
Among the new additions in 2025 is Iowa, led by Governor Kim Reynolds (R). The Hawkeye State transformed from a progressive income tax system with a top rate of 8.98% in 2013 to a 5.7% top rate in 2024. As of January 1, 2025, Iowa shifts to a 3.8% flat income tax. Moreover, Iowa's inheritance tax concludes its phaseout, a move approved by legislators in 2021.
On January 1, 2025, Louisiana transitions from a tiered income tax with a base rate of 1.85% and a maximum rate of 4.25%, to a uniform 3% rate in accordance with legislation endorsed by Governor Jeff Landry (R) in late December. Some states, which have already adopted a flat tax, will observe a decrease in their rate in 2025. For instance, Indiana will also adopt a 3% flat income tax starting January 1, 2025, reducing the rate from 3.05%. Indiana's flat income tax is planned to further decrease in 2027 to 2.9%.
North Carolina, having been one of the original nine states offering personal income tax reductions starting on January 1, 2025, is now among three states where a corporate income tax reduction becomes effective. North Carolina's corporate income tax decreases from 2.5% to 2.25% on January 1, 2025, and is scheduled to decline to zero by 2030.
Pennsylvania, following a tax reform bill passed by its former Governor Tom Wolf (D), sees its corporate income tax drop from 8.49% to 7.99% at the beginning of 2025. Nebraska, in contrast, observes a decrease in its corporate tax rate from 6.5% to 6.24% in the same period.
Ohio's Commercial Activity Tax (CAT) is a gross sales tax that the state imposes on businesses instead of a corporate income tax. Ohio's CAT exemption doubles at the start of 2025, increasing from the $3 million to $6 million in revenue that is currently exempt.
Members of President-elect Donald Trump's administration and Congress are working to restore the initial year of deductibility for business capital investments and research and development costs. As federal full business expensing has dwindled in recent years, numerous states have enacted legislation to reinstate full business expensing at the state level. Louisiana will be the third state to legally approve full business expensing at the state level on a permanent basis, commencing on January 1, 2025.
On January 1, 2025, New Hampshire becomes the eighth state without any income tax whatsoever, as the Granite State concludes the elimination of its Interest & Dividends tax. The I&D tax was initially slated to be eliminated by 2027, but legislators passed a bill in 2023 to expedite the process.
The trend of states adopting lower and more uniform income tax rates has gained considerable momentum in 2024. With preparatory measures in place as lawmakers prepare for new legislative sessions in January, this policy direction appears set to continue through 2025 and beyond.
- This momentum in adopting lower income tax rates can be attributed in part to fiscal policy decisions, such as reducing income tax rates and shifting to flat tax systems.
- Several states, including Iowa and Louisiana, have recently reformed their tax policies by lowering income tax rates, including income tax rates for businesses and individuals.
- The tax reform in Iowa involved not only a decrease in income tax rates but also the elimination of their inheritance tax, a change that was approved by legislators in 2021.
- As a result of these tax reforms and policy changes, income tax rates have significantly declined in states like Louisiana and Indiana, leading to a more favorable tax environment for businesses and individuals.
