1. What's New in 2025
In 29 states and Washington, D.C., people pay marginal income tax rates, meaning higher earnings are taxed at higher rates. This differs from a flat tax, which charges everyone the same rate regardless of income.
Nine states reduced their tax rates effective Jan. 1, 2025. Some have flat tax rates and some impose marginal rates:
- Indiana
- Iowa
- Louisiana
- Mississippi
- Missouri
- Nebraska
- New Mexico
- North Carolina
- West Virginia
2. States With a Flat Tax Rate
Fourteen states fall into the flat-tax category:
- Arizona
- Colorado
- Georgia
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Massachusetts
- Michigan
- North Carolina
- Pennsylvania
- Utah
Mississippi doesn't make the list but it falls into a gray area. This state technically has two income tax rates but one of them is 0%. It applies to income under $10,000. All income over $10,000 is taxed at 4.4% as of 2025.
3. States with No Income Tax
Some are lucky enough to reside in one of the nine states without an income tax. The nine income-tax-free states as of 2025 are:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Wyoming makes the list because this state doesn't tax earned income, only capital gains.
4. Individual Income Tax Changes
On January 1, 2025, nine states—Indiana, Iowa, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, and West Virginia—reduced individual income tax rates, while South Carolina will make a temporary reduction permanent and pursue further cuts.
Iowa and Louisiana will switch to single-rate taxes, following a trend toward flat taxes. New Hampshire will eliminate its tax on interest and dividends, and Hawaii will widen tax bracket widths to expose more income to lower rates.
5. Corporate Income Tax Changes
Nebraska, North Carolina, and Pennsylvania lowered their corporate income tax rates on January 1, 2025. New Mexico eliminated its lower bracket, leading to higher corporate taxes. Louisiana adopted permanent full expensing, Nebraska introduced 60 percent first-year expensing, and Connecticut and Rhode Island extended their net operating loss carryforward periods.
Massachusetts and Montana implemented single-sales factor apportionment, New Jersey introduced a tax credit for AI investments, Ohio increased the Commercial Activity Tax threshold, Illinois raised the exemption for its capital stock tax, and Mississippi is phasing it out.
6. Sales and Use Tax Changes
Louisiana is set to restore a 5 percent sales tax rate, up from a temporary 4.45 percent rate, to help pay for reforms elsewhere in the tax code, while broadening its tax base to include digital goods. Kansas will exempt groceries from the sales tax, narrowing its base.
Illinois broadened its sales tax base to include retail leases of certain forms of tangible personal property (TPP). Georgia localities will receive authority to impose new local option sales taxes to offset the cost of a new property tax relief program.
7. Other Changes
Several states will implement property tax relief measures in 2025, and Wyoming, via a ballot measure, has enacted a distinction between residential and non-residential property for tax purposes.
New Jersey will be increasing taxes on fuel, while New York and North Carolina drivers should see slight relief. States like Vermont and Wisconsin will begin taxing EV infrastructure, while Rhode Island will start taxing nicotine delivery devices.
8. The Bottom Line
The extent of your state-level tax bill varies depending on where you live. Some states impose a single, flat tax rate. Others tax your top dollars at a higher percentage as you earn more. A few have no income tax at all.
State tax liability can be further complicated by states changing their tax codes from one year to the next. Be sure to do your research before you prepare your 2024 state tax return and do your homework so you can do effective tax planning for 2025. Check our step-by-step guide for your tax filling 2025.
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