Number Of Flat And Zero Income Tax States Grows As 2025 Begins

The number of states with a flat rate income tax has grown by more than 50% over the past decade, rising from nine in 2013 to 14 2024. On New Year’s Day 2025, the ranks of flat income tax states will grow by two, as Louisiana and Iowa complete shifts from progressive to single rate income taxes.

Among the new flat tax states in 2025 is Iowa. Under the leadership of Governor Kim Reynolds (R), the Hawkeye State moved from a progressive income tax system with a top rate of 8.98% to a 5.7% top rate in 2024. On January 1, 2025, Iowa will shift to a 3.8% flat income tax. Iowa’s inheritance tax also completes a phaseout that legislators approved in 2021.

On the first day of 2025, Louisiana moves from a graduated income tax with a bottom rate of 1.85% and a top rate of 4.25%, to a 3% flat income tax in accordance with legislation enacted by Governor Jeff Landry (R) this past fall. States that have already adopted a flat tax, will see their rate lowered in 2025. Indiana, for example, will also have a 3% flat income tax take effect on January 1, 2025, with the rate coming down from 3.05%. Indiana’s flat income tax is scheduled to fall again in 2027 to 2.9%.

In North Carolina, meanwhile, the state’s flat income tax drops from 4.5% to 4.25% on January 1, 2025. A year later, at the start of 2026, the rate will fall again to 3.99%.

North Carolina, in addition to being one of the nine states with a personal income tax cut taking effect at the start of 2025, is one of three states where a corporate income tax cut becomes effective. North Carolina’s corporate income tax will fall from 2.5% to 2.25% on January 1, 2025 and is scheduled to phase down to zero by 2030.

As part of a tax reform package enacted by Pennsylvania Governor Josh Shapiro’s (D) predecessor, Tom Wolf (D), the Keystone State’s corporate income tax falls from 8.49% to 7.99% at the beginning of 2025. In Nebraska, meanwhile, the corporate rate drops from 6.5% to 6.24%.

Ohio’s Commercial Activity Tax (CAT) is a gross receipts tax that the Buckeye State imposes on employers in lieu of a corporate income tax. Ohio’s CAT exemption will double at the start of 2025, rising from the $3 million to the first $6 million in revenue that is now exempt.

President-elect Donald Trump and members of Congress will be aiming to reinstate full year one deductibility for business capital expenditures as well as research and development costs. As federal full business expensing has phased out in recent years, however, lawmakers in a number of states have taken action to reinstate full business expensing at the state level. On January 1, 2025, Louisiana will become the third state to enact full business expensing at the state level on a permanent basis.

On January 1, 2025, New Hampshire becomes the eighth true no-income-tax state, as the phaseout of the Granite State’s Interest & Dividends is completed. The I&D tax was initially scheduled to be zeroed out by 2027, but legislators passed a bill in 2023 to speed up the phaseout.

The trend of states moving toward lower and flatter income tax rates has continued apace in 2024. Based on the preparatory activity taking place in state capitals as lawmakers gear up for new legislative sessions in January, this policy trend is poised to persist into 2025 and beyond.