An analysis of the state individual income tax rate trends shows more states moving away from graduated tax rates to flat rate. Currently, 29 states have graduated individual tax rates, and 9 states have no individual income tax. The remaining 12 states have adopted a flat individual tax rate.
Arizona and Idaho adopted flat rates in 2023, Georgia in 2024, and the most recent being Iowa in 2025. These states joined Colorado, Illinois, Indiana, Kentucky, Michigan, North Carolina, Pennsylvania, and Utah, which have flat rates.
We also see tax rates being lowered in states that have graduated tax rates. Arkansas saw rates dropping from .9%-7% in 2019 to 0%-3.9% in 2025, and Missouri’s tax rates dropped from 1.5%-5.4% in 2019 to 0%-4.7% in 2025. Ohio, Oklahoma, South Carolina and Vermont have also lowered their graduated rates. In many states that have adopted graduated rates, the rates are so low that they are nearly flat. These low graduated tax rates offer the benefits of marginalization.
In the states that conform to the federal tax code, implementation of the Tax Cut and Jobs Act (TCJA) resulted in increased revenues due to NOL limitations, excess business loss limitations, GILTI and lost itemized deductions. Implementation of the TCJA resulted in states having surpluses in their budgets, resulting in states resorting to tax cuts, lowering their graduated tax rates, or moving to flat rates. Taxpayers in Massachusetts, Minnesota, Georgia, Idaho and Oregon received refund of surplus revenue collected during 2021-2023.
Benefits and Drawbacks of a Flat Tax Structure
Implementing flat tax rates has benefits and drawbacks:
Benefits
- Simplicity in implementation.
- Easier for taxpayers to estimate their tax liabilities and provides more certainty.
- Flat rates tend to be lower than graduated rates.
Drawbacks
- Flat tax rates are inequitable and place more burden on low-income and middle-class income families.
- Flat tax imposes more burden on small business owners who operate as sole proprietors as flat rates benefits the high-income taxpayers more than the small business owners.
- Flat rates and tax cuts may result in revenue losses for state budgets.
In the last few years, we have also seen a reduction in corporate income tax rates in 13 states. Georgia, Idaho, Kansas, Missouri, North Carolina, Oklahoma, Pennsylvania, and Utah have lowered their flat income tax rates, with North Carolina moving to a 0% rate by 2030. We have also seen a reduction in graduated tax rates in Arkansas, Indiana, Iowa, Louisiana, and Nebraska. Indiana moved from graduated rates to a lower flat rate in 2022. These changes are an effort to attract more businesses to their states.
While there is no one tax structure that benefits all, it will be interesting to see how many more states move towards a flat tax structure in the coming years.
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For more information on this topic, please contact a member of Withum’s State and Local Tax Services Team..
