Which States Have a Flat Income Tax Rate?

There Are Only Eight Flat Tax States

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"Flat tax states" -- the phrase has the potential to give many people a headache because taxes are complicated under the best of circumstances without adding a different wrinkle or two. In fact, proponents of a flat income tax system herald it as being a good thing, far simpler and much fairer than the tax systems that are in place in most states.

In its purest form, a flat tax system is exactly what it sounds like -- all taxpayers are subject to the same flat tax rate regardless of how much they earn.

Supporters say this encourages wealth because top earners are not punished with higher tax rates.  

So What's Wrong With a Flat Tax System? 

Not everyone is on board with this concept. Opponents argue that the flat tax system places an unfair burden on low-income taxpayers, those who are the least likely to be able to give up 3 to 5 percent of their incomes without any help from tax deductions and various exemptions -- the flat tax typically eliminates many of these.

Giving up 5 percent of $100,000 in income leaves plenty of money for fixed-cost necessaries like a gallon of milk, but 5 percent of $10,000 might put that milk out of reach. This could force more low-income residents to look to public assistance to help them make ends meet.

The tax in flat tax states doesn't usually apply to unearned income like interest from investments and capital gains from the sale of assets, so taxpayers who are wealthy enough to afford to make their money grow can realize these profits tax-free.

 The flip side to this is that the flat tax is can negatively affect the middle class -- and by extension, the economy -- because it doesn't encourage investing or saving toward retirement through tax breaks.

A Comparison of Flat Tax States 

Tax concepts are rarely black-and-white, and among the states that have adopted a flat tax system, specific rules can differ.

Some do offer exemptions for the elderly, the disabled, and low-income taxpayers. Not all of them abolish all tax deductions. 

Eight states use flat tax systems as of the 2016 tax year. Most allow personal exemptions for individuals and their dependents. 

  • Colorado: 4.63 percent. Colorado passed legislation in 2016 to provide a $5,000 tax credit for electric vehicles.
  • Illinois: 3.75 percent. This state is considering doing away with its flat tax system, with legislation pending as of 2016. 
  • Indiana: 3.3 percent
  • Michigan: 4.25 percent. Voters resounding vetoed a flat tax rate increase in May 2015, prompting lawmakers to consider a "graduated" version of the tax instead. No such legislation is pending as of May 2016, however.  
  • North Carolina: 5.75 percent. This state enacted a flat tax system effective 2014. North Carolina has the highest rate among all states using this tax system, and it eliminates the earned income tax credit and personal exemptions, as well as deductions for medical expenses, retirement contributions, child care and college 529 plans.  
  • Pennsylvania: 3.07 percent. Pennsylvania law does not recognize tax exemptions for individuals or their dependents. 
    • Utah: 5 percent, second only to North Carolina.