State Policy Network
The Income Tax: Explained

You probably haven’t noticed—and why would you? Rising prices and historic inflation are dominating headlines. But there’s another economic story unfolding in many states across the country that provides some relief to many Americans struggling with the high cost of living. Several states are cutting taxes—and in particular cutting or eliminating their income tax. In fact, 26 states have enacted individual income tax rate reductions from 2021 to 2023. And even more states are set to join that list in 2024.  

But what exactly is the income tax, how does it work, and what is driving state leaders to reduce or eliminate the biggest source of revenue for the federal government and most states?  

Let’s take a look. 

What is the individual income tax?  

The income tax is a tax on a person’s wages, salary, or other forms of income. The federal government and most states levy an income tax. The federal income tax is highly progressive, which means you are taxed at higher rates as your income goes up. States, however, may have a progressive income tax, a flat income tax, or no income tax at all.  

Flat Income Tax vs. Progressive Income Tax 

If you live in a state with a flat income tax, your state will tax everyone’s taxable income at the same rate. If you’re in a progressive income tax state, people with higher incomes are taxed at higher rates than people with lower incomes. A progressive income tax is sometimes referred to as a graduated-rate income tax. 

What States Have a Flat Tax?  

12 states have a flat income tax: Arizona, Colorado, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, New Hampshire, North Carolina, Pennsylvania, Utah, and Washington (but Washington does tax capital gains on high-income earners). Here’s an example of how the flat tax works: Arizona’s income tax rate is 2.50%—which means all Arizonans will pay the same rate of 2.50%, regardless of how much money they make.  

What States Have No Income Tax?  

Nine states have no income tax. These include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.  

What States Have the Highest Individual Income Tax Rates?  

California (13.30%), New York (10.90%), New Jersey (10.75%), and Washington, DC (10.75%) have the highest top marginal state individual income tax rates. New York City has an additional income tax with a top rate of 3.876%.

What is Driving States to Cut Income Taxes?  

According to Michael Lucci, a Visiting Economic Policy Fellow at State Policy Network, the movement to cut income taxes is driven in large part by strong state revenues. States received record amounts of tax revenue in every year since the coronavirus pandemic. The revenue growth rate has been so high, even people who look at state budgets every year find it hard to believe. Because revenue has exceeded states’ annual budget needs, many states decided to provide tax relief to their residents by reducing the income tax. Those states were able to do this while still funding critical budgetary programs.  

States have had two incentives to use their revenue surpluses for income tax relief. First, states are competing for new residents. In particular, higher-earners have been untethered from a physical work place due to the advent of remote work. States generally want to attract or retain these people.

Second, a federal cap on the deductibility of state taxes gives people more incentive to move to states with lower tax burdens. According to the WSJ, in recent years, Florida and Texas have accounted for over half of all US population growth even though they represent only 15 percent of U.S. population.

How Does Lowering or Eliminating the Income Tax Help Ordinary Americans?

Reducing state income taxes means there is a lower tax burden on taxpayers, including low-income earners. In fact, income tax rate reductions are often coupled with an expanded standard deduction, which disproportionately benefits lower earners. With this extra money in hand, Americans can better afford everyday necessities including their rent or mortgage, groceries, gas, and electricity, among other essentials.  

Some researchers argue that cutting the income tax primarily benefits top earners. But this misses the fact that tax relief is distributed in some proportion related to taxes paid. People who pay more dollars in taxes can receive more dollars in relief when you simply cut the tax rate. For example, if one person pays $100 in taxes and the other pays $1000, a 10% cut in taxes means $10 in relief for one and $100 in relief for the other. But in the end, the second taxpayer is still paying 10x what the first taxpayer is paying. Therefore, cutting tax rates can only lower the tax burden for people who have a tax liability—for both high earners and low-income families.  

In addition, workers at all income levels benefit from a more competitive and dynamic state economy. Income tax reform is one way to supercharge state competitiveness.

Furthermore, America’s tax-and-transfer fiscal system will remain highly progressive regardless of what states do because the federal fiscal structure is one of the most progressive in the world.

What States Could Cut Their Income Tax in 2024?  

State legislative sessions are currently underway, and many states have introduced legislation that would reduce or eliminate their income tax. The following states are considering lowering their income tax this year:  

State think tanks in each of these states, including Iowans for Tax Relief Foundation, Kansas Policy Institute, Oklahoma Council of Public Affairs, Show-Me Institute, Cardinal Institute, Palmetto Promise Institute, and the Thomas Jefferson Institute are encouraging state leaders to adopt income tax reforms so more Americans can benefit from a lower tax burden.  

Related Reading:  

Strong Revenue and Fiscal Federalism Are Driving a State-Based Tax Revolution 
State Policy Network in National Review  

Iowa’s Next Tax-Reform Opportunity 
Iowans for Tax Relief Foundation in National Review  

Individual Income Tax 
Tax Foundation 

State Individual Income Tax Rates and Brackets, 2024 
Tax Foundation 

Organization: State Policy Network