While the federal government applies a consistent tax system to every citizen, states have tax rates they set independently from Uncle Sam. States can apply flat taxes, graduated taxes, or no taxes to their residents. If you don’t know about your state’s current income tax system, finding out can help you compare how much you would pay by staying or moving to another part of the country. Here is every state that currently uses a flat income tax and how it could benefit you. If you’re looking for need hands-on guidance with tax planning, a financial advisor could help you lower your tax burden.
What Is a Flat Income Tax?
A flat income tax means that all taxpayers, regardless of their income level, pay the same percentage of their income as taxes. The tax rate remains constant or proportional for all taxpayers regardless of their amount of taxable income.
For example, say your state has a flat tax rate of 15%. A taxpayer earning $30,000 would pay 15% of their income in taxes ($4,500), while a taxpayer earning $300,000 would also pay 15% of their income ($45,000). So, while the tax percentage stays the same across income levels, your specific income determines how much you owe in taxes.
What States Have a Flat Income Tax?
For 2024, thirteen states have flat income taxes. They are:
- Arizona (2.50%)
- Colorado (4.40%)
- Georgia (5.49%)
- Idaho (5.80%)
- Illinois (4.95%)
- Indiana (3.05%)
- Kentucky (4.00%)
- Michigan (4.25%)
- Mississippi (4.70% on all income after the first $10,000)
- New Hampshire (3.00% tax on interest and dividend income only; the state is phasing it out and has scheduled this tax to cease after December 31, 2026)
- North Carolina (4.50%)
- Pennsylvania (3.07%)
- Utah (4.65%)
Iowa will also join this list in a few years, according to its current legislation. In 2026, the state will shift to a flat tax rate of 3.90%.
Flat Tax Rate vs. Graduated-Rate Progressive Income Taxes
A flat tax rate imposes the same percentage of taxes due on all income levels. While some states have this system, most impose a graduated (or progressive) rate system. The federal government has graduated rates as well.
In a progressive tax system, the tax rate increases as income levels rise. Higher-income individuals pay a higher percentage of their income in taxes when compared to those with lower incomes.
The United States federal tax brackets for 2024 reflect this pattern. Specifically, the rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The more money you make, the higher taxes you incur because of the raised percentages.
A significant point of clarification on the progressive tax system in the United States is that the rates apply to different levels of income. For example, say you’re a single filer with $200,000 of annual income. This means the top portion of your income (all income above $191,950) gets taxed at 32% for tax year 2024. So, only $8,050 receives this tax rate. Looking at the tax table, you see that most of your income is beneath this bracket. The income between $100,525 and $191,950 is taxed at 24%, and so on. So, each tax rate applies to part of your income, with lower percentages applying to lower levels of income.
Advantages of Flat Income Tax States
As the example above demonstrates, progressive or graduated-rate tax systems can be complex. On the other hand, a flat tax rate is straightforward and takes the same proportion of income from each taxpayer.
The key to understanding how a flat state income tax affects you is to evaluate your income and cost of living. For example, Mississippi has a slightly higher income tax rate than Colorado. However, the tax doesn’t apply to the first $10,000 of every taxpayer’s income. Plus, the cost of living in Mississippi is nearly 14% lower than the national average. On the other hand, the cost of living in Colorado has recently skyrocketed, offsetting the advantages that a low flat tax rate might bring otherwise.
In the case above, a taxpayer with $50,000 of annual income would fare better in Mississippi. Only $40,000 of their income would be taxed, resulting in an annual cost of $1,880. The same income would result in $2,200 in income taxes in Colorado.
For a comparison, both of these figures are lower than Hawaii, where a single filer with $50,000 of income would pay over $3,100 in income taxes, according to SmartAsset’s Hawaii income tax calculator. In many cases, flat taxes can benefit higher-earning taxpayers more than graduated rates, where the percentages climb with income.
Downsides to Flat Income Tax State
A flat income tax can also extract more income from earners with lower wages who need more money for basic expenses. For example, if the federal government switched to a 20% flat tax rate, families with incomes up to $94,300 would pay more taxes than they do currently. So, graduated rates can help keep taxes low for households with modest incomes.
Some states have graduated systems with forgiving rates that benefit lower-income earners. In the example before, the single filer with $50,000 would pay less income taxes in California – about $1,623 for 2023. The state’s graduated income taxes apply rates of 1%, 2% and 4% in ascending order, allowing taxpayers to keep higher percentages of their wages.
These brackets allow taxpayers with middling incomes to pay less into the tax system and put more toward housing, food and fuel. Plus, California imposes an extra 1% tax on incomes above $1,000,000 to help fund its mental health services. This way, earners with ample financial capacity help fund programs for earners who may not otherwise afford critical health services.
Bottom Line
A flat income tax system, as exemplified by the states that currently employ this approach, imposes a uniform tax rate on all income levels. The simplicity of this model is evident, offering clarity and ease of administration. However, its impact on individuals varies, and the choice between a flat income tax and a progressive tax system is multifaceted. Whether it is advantageous or disadvantageous for taxpayers depends on income, cost of living and specific state regulations.
Tax Planning Tips
- A financial advisor can help you take advantage of tax benefits when filing in
your state. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. - Getting an estimate of your tax bill before filing can help you see if you’ll owe or qualify
for a return. An online income tax calculator will show how much you owe in federal,
state, and local income taxes.
Photo credit: ©iStockPhoto/AJ_Watt, ©iStockPhoto/TuiPhotoengineer, ©iStockPhoto/elenaleonova