They say there are two certainties in life: death and taxes. Or are there really? Every American loathes the arrival of the dreaded Tax Day, but it may look different—and much less frightening—going forward depending on which state you live in. Over the last several years, a growing number of states have moved to slash or abolish their income taxes completely. Income taxes are the largest source of federal revenue for both the federal government and many state governments, so cutting them entirely may seem like a drastic policy choice. Why are states moving to abolish the income tax? Where will the money for state budgets come from? To answer these questions, we need to start from the beginning.

What is the Income Tax?

For the young and uninitiated, the income tax is as simple as it sounds: it is a tax on your personal income that you make from a variety of sources, mainly your wages. The federal government, many state and local governments, including counties, cities, and school districts, all levy income taxes, which are typically deducted from your paycheck. These taxes are calculated using income brackets, where each portion of your income is taxed at a specific rate that increases the more you earn. So, while higher earners pay more, only the income within each bracket is taxed at that bracket’s rate. This is known as a progressive tax structure.

For tax year 2025, the IRS lists the federal income bracket rates at:

  • 10% on income up to $11,925 (up to $23,850 or less for married couples filing jointly).
  • 12% on income from $11,926 to $48,474 (from $23,850 for married couples filing jointly).
  • 22% on income from $48,475 to $103,349 (from $96,950 for married couples filing jointly).
  • 24% on income from $103,350 to $197,299 (from $206,700 for married couples filing jointly).
  • 32% on income from $197,300 to $250,524 (from $394,600 for married couples filing jointly).
  • 35% on income from $250,525 to $626,349 (from $501,050 for married couples filing jointly).
  • And 37% for individual single taxpayers on income greater than $626,350 (from $751,600 for married couples filing jointly).

The state income tax is calculated in a similar way, though the rates vary from state to state.

Why Do We Have It?

The first application of an income tax in the United States came during the Civil War. The U.S. Congress implemented the tax to fund the war effort against the Confederacy. When the war ended, Congress allowed the income tax to expire, but a desire among some for predictable federal revenue prompted multiple attempts at passing a permanent income tax over the following decades. From the nation’s founding until 1913, almost all federal revenue was derived from tariffs and excise taxes. The overall tax obligation was low, but yearly variations in trade and spending meant the federal government could not rely on having a consistent stream of income.

On multiple occasions, Congress attempted to pass a permanent income tax law, but the Supreme Court routinely struck them down. Finally, in 1913, Congress passed and the states ratified the 16th Amendment, constitutionalizing a federal income tax. Income taxes quickly became the federal government’s primary revenue source and remain so today, as tariffs were diminished during an era of free trade and economic prosperity. Many states have income taxes whose histories reflect or differ from the federal government’s. Wisconsin implemented the first state income tax in 1912, followed by Mississippi (Hawaii was technically the first in 1901, but it wasn’t a state yet at the time). By the 1930s, most states had adopted an income tax.

At its inception, the federal income tax was modest. The first peacetime tax applied a 1% rate on incomes above $3,000 ($100,000 in today’s money), affecting only a small fraction of Americans, and topped out at 7% for the wealthiest. But wars and welfare programs quickly expanded the reach. During World War II, the top rate soared above 90%. In the decades that followed, the tax burden spread to more and more Americans while the rates generally declined, transforming the income tax from a narrow levy on the wealthy into a central feature of everyday economic life. Over time, the system grew more complex, with layers of deductions, credits, and exemptions that made compliance difficult and economically distortionary.

The Income Tax In Flux

The income tax is facing its greatest transformation in over a century. For the last few decades, states have been experimenting with modifications to or replacements of their income tax. Since 2020, more than a dozen states have cut their income tax rates, flattened brackets, or put the states on a pathway towards eliminating the tax entirely.

Which states are leading the way? Why are they doing it? And what can other states learn from their experimentation?

The number of states that have opted to end their income taxes remains small: just Alaska, Oklahoma and Mississippi so far. Alaska abolished their income tax in 1980, so the process has been a slow-going one. Mississippi’s governor has signed legislation this year to begin phasing out their income tax. As we wrote at the time: “Starting next year, Mississippi will reduce its income tax rate in 0.25 percentage point increments until it is lowered to 3% in 2030. After that, the rate will continue to decrease if certain revenue targets are achieved until it is fully eliminated.”

Two SPN affiliates—Empower Mississippi and the Mississippi Center for Public Policy—were instrumental in advancing this reform. Both organizations have been long-time advocates for eliminating the state income tax, emphasizing its potential to drive economic growth, attract businesses, and reduce the cost of living. Through research, media engagement, and direct collaboration with state leaders, they helped make the case for change.

Oklahoma has joined the growing list of states rethinking how they tax work. This year, lawmakers advanced a bill to lower the state’s top income tax rate to 4.5 percent starting in 2026, while setting the stage for full elimination over time. The Oklahoma Council of Public Affairs, an SPN affiliate, played a key role in shaping the conversation by highlighting how lower tax burdens can drive job creation, expand opportunity, and keep the state competitive in the region. Their sustained efforts helped frame tax reform as a strategic path to growth.

Ohio is also on the roll with its recent decision to join the flat tax movement by adopting a 2.75 percent single-rate income tax, the second-lowest flat tax in the nation. With this reform, Ohio became the 15th state to abandon a progressive, multi-bracket system in favor of a simpler, more predictable code. The Buckeye Institute, an SPN affiliate, was instrumental in the effort, making the case that a low flat tax would improve transparency, boost economic competitiveness, and help Ohio shake its Rust Belt reputation.

In the cases of Alaska, Mississippi, and Oklahoma cases, legislatures have only voted to end their income taxes once other revenue streams were in place. Alaska abolished its income tax upon the completion of the Trans-Alaska Pipeline System, which poured billions of dollars into the state’s coffers. Mississippi and Oklahoma, meanwhile, have paired their income tax phaseouts with increases in fuel taxes and a revenue “trigger” system that ensures future rate cuts only happen when general fund revenues can support them. Other states without income taxes rely more on sales taxes, property taxes, severance taxes, or tourism revenue. This allows residents to choose how to spend the entirety of their income rather than only a fraction of it. States also trim spending or grow their economies fast enough to offset the loss.

Eight other states have no income taxes: Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. From big to small, north to south, east to west, income tax-free states have found ways to make it work.

States are cutting or eliminating their income taxes for good reason. Income taxes make it more expensive to work, hire, and invest. By lowering that burden, states can grow their economies, attract new residents, and help families keep more of what they earn, all while becoming more competitive with other states. Getting rid of them simplifies paying taxes, reduces government intrusion into personal finances, and gives people more flexibility. For them, a tax code that rewards work, not punishes it, is the smarter path forward.

Income taxes are among the most economically damaging ways for governments to raise revenue. As the Tax Foundation explains, they discourage productive behavior such as working, saving, and investing by reducing the return on those activities. This creates disincentives to build capital, start businesses, or prepare for retirement. These are exactly the kinds of behaviors states should want to encourage.

Income taxes are also volatile, rising and falling with the economy, which makes state budgets more vulnerable during downturns. As the population ages and the share of working-age residents declines, relying on income taxes becomes even riskier. Policymakers seeking more stable and sustainable models are increasingly turning to broader tax bases, including consumption taxes, which the Tax Foundation notes are less harmful to growth and better suited to today’s economic and demographic realities.

Holding the Line

The path ahead for states without an income tax or those looking to abolish theirs isn’t without risk. While many states are finally reaping the benefits of lower income tax burdens, a new challenge is emerging that could test their resolve: President Trump’s One Big Beautiful Bill.

Buried beneath the headline tax cuts and campaign-trail promises are major shifts in how states must manage Medicaid and SNAP. The bill limits waivers, adds stricter work requirements, and, most critically, forces states to pay a larger share of the cost of these programs. States that make frequent errors in distributing benefits, or rely on outdated systems to determine eligibility, will be hit especially hard. Under the new rules, if a state overpays, underpays, or gives benefits to someone who doesn’t qualify, it may have to pick up more of the tab. As these changes phase in, lawmakers may feel pressure to undo hard-won income tax reforms just to keep the budget afloat.

That would be a mistake. Rolling back income tax cuts now would not only stall economic momentum but send a dangerous signal: that the only way to balance a budget is by taxing work. Quite the opposite is true. Lowering income taxes attracts workers, entrepreneurs, and investment. It encourages people to stay, build, and contribute. When more people are working and earning, the tax base grows, even if the rate is lower. The loss from one tax source is often mitigated by stronger sales, property, and business tax revenues. 

The better path forward is the harder one of thoroughgoing reform. States should focus on fixing what’s broken: modernizing benefit systems, cutting waste, streamlining regulations, and rethinking how dollars are spent. SPN affiliates have shown it’s possible. SPN’s Center for Practical Federalism is working with states across the country, helping them prepare for what some experts believe will be a nationwide budget tsunami, if state-level SNAP and Medicaid program error rates aren’t lowered.

This kind of long-term reform doesn’t happen in a vacuum. It’s made possible by what we call Durable Freedom Infrastructure: a network of policy organizations, litigators, communicators, and civic leaders working together to advance limited government over the long haul. In state after state, this infrastructure holds government accountable, pushes back against special interests, and helps lawmakers stay the course. Income tax reform is just one example of what becomes possible when that infrastructure is strong.