A flat tax rate is a rate that is even across the board; all taxpayers pay the same rate regardless of how much they earn. The concept has a lot of support but has also seen opposition.
The map below illustrates which states have a flat income tax. Hover over the teal-colored states for more information. Then, keep reading to learn more details about taxes in these states, why some taxpayers love the system, and arguments from its critics.
Support and Criticism for a Flat Tax System
Supporters of a flat tax system argue that it encourages wealth accumulation because top earners aren't punished with higher tax rates. Since everyone pays the same rate, the system is far simpler than the progressive tax system in place in most states.
Opponents of the flat tax system argue that it places an unfair burden on low-income earners—the poorest residents pay the same tax rate as the richest people in the state.
Giving up 5% of $100,000 in income leaves plenty of money for housing, food, and recreation, but 5% of $10,000 might threaten an individual's ability to afford necessities like food and shelter.
There's also debate over whether or not a flat tax rate encourages investing and saving for retirement. On one hand, a flat tax rate means there's less of a reason for residents to seek out tax shelters in the form of retirement accounts. On the other hand, a state's flat tax rate might not necessarily apply to unearned income, such as interest from investments and capital gains from the sale of assets. If income taxes don't apply to unearned income, taxpayers who can afford to invest and make their money grow can still realize tax-free capital gains and investment income (at the state level—federal taxes still apply).
A Comparison of Flat Tax States
Tax concepts are rarely black and white, and specific rules can differ among the states that have adopted a flat tax system. For the 2021 tax year (the taxes you'll file in 2022), state individual income taxes for flat tax states include:
Single individuals can claim a standard deduction of $12,550, while those who are married can claim a standard deduction of $25,100. There are no personal exemptions.
The personal exemption allowed for individuals is $2,325 per person, $4,650 for married couples, and $2,325 for dependents. There is no standard deduction.
Personal exemptions are $1,000 if you're a single taxpayer, up to $2,500 for each of your dependents, and $2,000 for married couples who file jointly. There is no standard deduction.
In 2018, Kentucky adopted the flat tax system (it became effective in the 2019 tax year). During that same time, they eliminated itemized deductions for medical and dental expenses, casualty or theft losses, moving expenses, and premiums paid for health and long-term care insurance. The standard deduction for individuals who are single or married is $2,690, and there are no personal exemptions.
There is no standard deduction, but personal exemptions are somewhat generous at $4,400 for single taxpayers and $8,800 for married taxpayers filing joint returns. There is also a $1,000 exemption for dependents.
Michigan taxes income at a flat, constant level of 4.25%. There's no standard deduction, but personal exemptions are $4,750 for both single taxpayers and dependents and $9,500 for married taxpayers who file jointly.
North Carolina (5.25%)
North Carolina collects the highest rate among all flat tax states. They enacted their system in 2014 and eliminated their earned income tax credit and personal exemptions at the same time. Deductions for medical expenses, retirement contributions, child care, and college 529 plans were also eliminated. For standard deductions, single individuals can claim $10,750, while those who are married can claim $21,500.
This rate is the lowest among flat tax states. Pennsylvania law does not recognize tax exemptions or standard deductions for individuals or their dependents.
Although the state does not technically have a standard deduction, it does offer a nonrefundable taxpayer tax credit equal to 6% of your federal deduction, and it also allows a personal exemption of $590 per dependent. The credit begins to phase out at $14,879 for single people and married couples filing separately, and $29,758 for married couples filing jointly.