Indiana, Montana, and Ohio Cut Income Tax Rates as Five More States Follow — Is Yours One of Them?

Millions of Americans started the new year with lighter tax burdens after eight states officially lowered their income tax rates on 1 January, marking another assertive move in the ongoing competition among US states to attract workers, businesses, and investment.

The reductions affect residents in Indiana, Kentucky, Mississippi, Montana, Nebraska, North Carolina, Ohio, and Oklahoma, according to an analysis by the Tax Foundation, a nonprofit think tank. For households still grappling with elevated living costs, the cuts offer modest but welcome relief in their pay packets.

'These reforms demonstrate that states continue to embrace policies that will give them a competitive edge and promote continued economic growth for years to come,' the Tax Foundation stated.

How Each State's Rates Have Changed

The changes vary considerably, but the overall trend is clear: rates are decreasing.

Ohio made the most dramatic shift, adopting a flat 2.75% rate on all non-business income exceeding $26,050 (£19,334), down from 3.125% under the previous graduated system, the Tax Foundation reported. Income below that threshold faces no state tax at all.

Indiana's flat rate dropped from 3% to 2.95%, with legislation scheduled to reduce it further to 2.9% on 1 January 2027, according to USA Today. The state has also outlined a plan to potentially reach 2.55% by the early 2030s, subject to revenue thresholds being met.

Kentucky recorded one of the steepest single-year declines, with its flat rate falling from 4% to 3.5% through a trigger mechanism established in 2022 legislation, according to CBS News. Montana's top marginal rate decreased from 5.9% to 5.65%, with a further cut to 5.4% planned for 2027. Meanwhile, the lower 4.7% rate remained unchanged, but its income bracket was expanded.

Nebraska sliced its top rate from 5.2% to 4.55%, as part of an ongoing phase-down targeting 3.99% by 2027, according to the Tax Foundation. North Carolina completed its multi-year reduction plan, bringing its flat rate from 4.25% to 3.99%. Oklahoma's top rate fell from 4.75% to 4.5%, and the state consolidated its six income tax brackets into three.

Mississippi reduced its rate from 4.4% to 4%, which the Tax Foundation describes as the final scheduled reduction under its multi-year phase-down programme.

The Fiscal Warning Signs

While proponents argue that lower taxes stimulate economic activity and improve competitiveness, critics warn that these cuts carry significant risks.

The nonpartisan Centre on Budget and Policy Priorities has cautioned that reducing or eliminating state income taxes could hinder investments in public services such as education.

Nebraska exemplifies this tension. Despite recording a $1.9 billion (£1.41 billion) budget surplus in 2023, the state now faces a projected shortfall of $432 million (£321 million), according to the Centre on Budget and Policy Priorities. Some Nebraska lawmakers have called for pausing further income tax cuts to shore up state finances, CBS News reported.

Mississippi's Path to Zero

The political pattern behind these cuts is clear. All eight states are led by Republican governors, Republican-controlled legislatures, or both.

Mississippi has pursued the most ambitious trajectory. Legislation signed by Governor Tate Reeves in March established a plan to reduce the income tax rate to 3% by 2030, with provisions allowing continued annual reductions until the rate reaches zero, according to CBS News. Currently, nine states impose no income tax at all, according to the Tax Foundation.

What This Means for Residents

Some residents in these states might notice a little extra cash after taxes, but it's unlikely to be life-changing. The real test will come in the years ahead, as leaders attempt to balance cutting taxes with maintaining essential public services like schools and police.

What happens next will depend on political decisions made behind closed doors. Not all benefits are immediate, and much depends on broader economic factors. Job figures, corporate investment, and the overall health of the US economy will all influence how sustainable these tax cuts prove in the long term.