States With Flat Income Tax Rates
A flat tax rate is exactly that—flat and 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 met with as much opposition.
Supporters note that it encourages wealth because top earners aren't punished with higher tax rates. The system is far simpler, and some say it's much fairer than the progressive tax system in place in most states.
Opponents of the flat tax system argue that it actually places an unfair burden on low-income earners. The rate ranges from approximately 3 percent to 5 percent of income and eliminates many tax deductions and exemptions so that earners pay taxes on more income.
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. The argument is that this forces more low-income residents toward public assistance to make ends meet.
As for the middle class, opponents say that the flat tax can also negatively affect them, and by extension, the economy, because it doesn't really encourage investing or saving toward retirement through tax breaks.
That said, the tax rate in flat tax states doesn't always apply to unearned income like interest from investments and capital gains from the sale of assets. Taxpayers who can afford to invest and make their money grow can still realize these profits tax-free at the state level.
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.
- Colorado: 4.63%. Colorado passed legislation in 2016 to provide a $5,000 tax credit for electric vehicles but offered no standard deduction or personal exemptions.
- Illinois: 4.95%. Although this state considered doing away with its flat tax system in 2016, the legislative pendulum swung the other way and the rate instead increased from 3.75%. The personal exemption allowed for individuals on Form IL-1040 decreased to $2,000 per person for tax years beginning on or after June 1, 2017.
- Indiana: 3.23%. The rate actually dropped a little here in 2017 from 3.3%. Personal exemptions are modest, just $1,000 if you're a single taxpayer up to $1,500 for each of your dependents, and $2,000 for married couples who file jointly.
- Massachusetts: 5.1%. The flat tax rate in Massachusetts has held steady for a few years. There's no standard deduction, but personal exemptions are somewhat generous at $4,400 for single taxpayers, double that for married taxpayers filing joint returns. Unfortunately, there's only a $1,000 exemption for each of your dependents.
- Michigan: 4.25%. This state has taxed income at a flat, constant level since October 2012. Voters resoundingly vetoed a flat tax rate increase in May 2015, prompting lawmakers to consider a "graduated" version of the tax instead, but no such legislation is pending as of 2017.
- North Carolina: 5.499%. North Carolina collects the highest rate among all flat tax states. This state enacted its system in 2014 and eliminated its earned income tax credit and personal exemptions at the same time, as well as deductions for medical expenses, retirement contributions, child care, and college 529 plans. Personal exemptions have been added back into the tax code as of 2017: $8,750 for single filers and $17,500 for married couples filing jointly. There are, however, still no exemptions for dependents.
- Pennsylvania: 3.07%. The rate here is the lowest among flat tax states. Pennsylvania law does not recognize tax exemptions for individuals or their dependents.
- Utah: 5%. Although the state does not technically have a standard deduction, it does offer a nonrefundable tax credit equal to 6% of your federal deduction, and it also allows personal exemptions.