As of January 1, 2025, nine U.S. states are reducing individual income tax rates, bringing potential financial relief to millions of residents. According to the Tax Foundation, this wave of tax cuts reflects a nationwide push to lower taxes, a trend that began during the pandemic when states saw surpluses in tax revenues. While proponents argue that these measures foster economic growth and competitiveness, critics, including the Institute on Taxation and Economic Policy (ITEP), warn they could jeopardize public services over time.

The tax cuts largely reflect political divides, with most changes implemented by Republican-led states. Here’s a detailed look at the states where tax cuts will take effect and what these changes mean for taxpayers.

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1. Indiana

• New Rate: 3% (down from 3.05% in 2024)
• Impact: While the cut is relatively small, a worker earning $65,000 annually will save about $33, according to IPB News.
• Political Leadership: Republican-controlled legislature and Governor Eric Holcomb.

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2. Iowa

• New Rate: Flat 3.8% (down from a top rate of 5.7% in 2024)
• Background: Governor Kim Reynolds signed the tax reform into law, arguing that the state had been over-collecting revenue from residents.
• Political Leadership: Republican trifecta in the statehouse and governor’s office.

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3. Louisiana

• New Rate: Flat 3% (previously a graduated tax with a top rate of 4.25%)
• Impact: For residents earning $30,000 to $40,000 annually—the state’s largest tax bracket—the tax cut will reduce state income taxes by 50%, saving $338 a year.
• Trade-off: To offset revenue losses, the state sales tax will rise to 5% (up from 4.45%).
• Political Leadership: Republican trifecta.

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4. Mississippi

• New Rate: 4.4% (down from 4.7%)
• Future Outlook: Governor Tate Reeves is pushing to eliminate the state’s individual income tax entirely, arguing it would make Mississippi more competitive with states like Florida, which have no income tax.
• Political Leadership: Republican-controlled legislature and governor.

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5. Missouri

• New Rate: 4.7% (down from 4.8%)
• Economic Context: This marks the fifth tax reduction under Governor Mike Parson, who cites the state’s strong economic growth, including the creation of 70,000 jobs in 2024.
• Political Leadership: Republican trifecta.

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6. Nebraska

• New Rate: 5.2% (down from 5.84% in 2024)
• Political Leadership: Republican-controlled legislature and governor.

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7. New Mexico

• New Rates: Six tax brackets ranging from 1.5% to 5.9% (revised from five brackets in 2024, which ranged from 1.7% to 5.9%)
• Impact: Married couples filing jointly will save about $303 annually.
• Focus: Tax reductions are primarily targeted at low- and middle-income residents.
• Political Leadership: Democratic trifecta.

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8. North Carolina

• New Rate: 4.5% (down from 4.75%)
• Future Changes: The rate is scheduled to drop again to 3.99% in 2026, continuing the state’s gradual tax reduction strategy.
• Political Leadership: Republican-controlled legislature and Democratic governor.

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9. West Virginia

• New Rate: Top rate reduced to 4.82% (from 5.12%)
• Revenue Context: The cuts are funded by a revenue surplus, allowing the state to pass savings on to residents.
• Future Goals: Governor Jim Justice aims to eventually eliminate personal income taxes altogether.
• Political Leadership: Republican-controlled legislature and governor.

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Why Are States Cutting Taxes?

Proponents argue that reducing income taxes can make states more attractive for businesses and residents, fostering economic growth. The Tax Foundation highlights this trend as part of a broader effort to create stable, competitive tax systems. For instance, Missouri Governor Mike Parson credits tax reductions with driving job growth, while Mississippi’s Governor Reeves believes eliminating income taxes could make the state more competitive with tax-free states like Florida.

However, not all policymakers agree. Critics, including ITEP, argue that these cuts could lead to reduced funding for essential public services like education, healthcare, and infrastructure. Louisiana’s tax reductions, for example, are partly offset by a sales tax hike, which may disproportionately impact lower-income households.

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What These Changes Mean for Taxpayers

While the immediate impact of these cuts may seem modest for some—like Indiana’s $33 savings for middle-income earners—others, such as Louisiana residents in the largest tax bracket, could see more significant reductions. Regardless of the amount, these changes signal a continued push by states to reshape their tax landscapes.

As these tax cuts take effect, it’s crucial for taxpayers to stay informed about how state policies could impact their financial planning. If you live in one of these states, consulting with a tax professional can help you maximize your savings while staying compliant with updated tax laws. Your partners at PSA CPA are happy to assist!  Call us at 301-879-0600 or email us at [email protected] – we can’t wait to work with you!