It's been nearly half a century since a U.S. state last abolished its income tax on wages and salaries.
However, recent developments in Mississippi and Kentucky suggest that these two states are now charting a course towards this goal, contingent on the continued growth of their economies.
This aggressive move towards eliminating income tax is perhaps the most striking example of a tax-cutting trend that has swept across states as they recover from the COVID-19 pandemic, buoyed by soaring revenues and unprecedented surpluses.
Yet, this comes at a time of heightened uncertainty for states as they anxiously anticipate the potential impact of President Donald Trump's cost-cutting measures and tariffs on federal funding for states and the broader economy.
According to the Associated Press, some fiscal analysts caution that the repeal of income taxes could leave states dependent on other forms of taxation, such as sales taxes, which disproportionately burden the poor. The 16th Amendment to the U.S. Constitution, ratified by states in 1913, empowers Congress to impose income taxes. Since then, most states have introduced their own income taxes.
Currently, eight states do not levy personal income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Washington, a ninth state, does not tax personal income from wages and salaries but does impose a tax on certain capital gains income exceeding $270,000.
When Alaska abolished its personal income tax in 1980, it was due to the state's coffers brimming with billions of dollars from oil revenue. While proposals to eliminate income tax have been made in other states, they have not been successful. Katherine Loughead, a senior analyst and research manager at the nonprofit Tax Foundation, noted, Its a lot easier to go without an individual income tax if youve never levied one. But once you become dependent on that revenue, it is a lot more difficult to phase out or eliminate that tax.
Mississippi's Republican Governor, Tate Reeves, recently signed a law that will gradually reduce the state's income tax rate from 4% to 3% by 2030. The law also sets state revenue growth benchmarks that could trigger further incremental cuts until the tax is completely phased out. The law also lowers the sales tax on groceries and increases the gasoline tax. If cash reserves are fully funded and revenue triggers are met each year, Mississippi's income tax could be eradicated by 2040.
Supporters of the income tax repeal believe it will attract businesses and residents, thereby boosting the states economy to levels comparable to Florida, Tennessee, and Texas. They argue that when people pay less in income taxes, they have more money to spend, which in turn increases sales tax collections. Governor Reeves stated that the tax repeal puts us in a rare class of elite, competitive states. He added, Mississippi has the potential to be a magnet for opportunity, for investment, for talent - and for families looking to build a better life.
However, Mississippi is one of the poorest states and heavily relies on federal funding. Democratic lawmakers have warned that the state could face a financial crisis if cuts in federal funding coincide with state income tax reductions. Neva Butkus, senior analyst at the nonprofit Institute on Taxation and Economic Policy, pointed out that the income tax provides a huge percentage of what the state brings in to fund things like schools and health care and services that everybody relies on.
In Kentucky, a 2022 law reduced the state's income tax rate and established a series of revenue-based triggers that could gradually lower the tax to zero. However, unlike in Mississippi, these triggers are not automatic. The Kentucky General Assembly must approve each additional decrease in the tax rate. This has led to a series of tax-cutting measures, including two new laws this year. One implements the next tax rate reduction from 4% to 3.5% starting in 2026. The second makes it easier to continue cutting the tax rate in the future by allowing smaller incremental reductions if revenue growth isn't sufficient to trigger a 0.5 percentage point reduction.
Democratic Governor Andy Beshear signed the legislation for next year's tax cut but allowed the other measure passed by the Republican-led legislature to become law without his signature. Beshear labeled it a bait-and-switch bill, arguing that lawmakers had assured the guardrails for income tax reductions would remain in place while pushing for the 2026 tax cut, then later in the session altered the triggers for future years.
New Hampshire and Tennessee already did not tax income from wages and salaries, but both states had taxed certain types of income. In 2021, Tennessee ended an income tax on interest from bonds and stock dividends that had been levied since 1929. New Hampshire halted its tax on interest and dividends at the start of this year. Other states are also pushing to repeal income taxes.
The Oklahoma House passed legislation in March that would gradually cut the personal income tax rate to zero if revenue growth benchmarks are met. That bill now is in the Senate. New Missouri Governor Mike Kehoe, a Republican, also wants to phase out the income tax. The House and Senate have advanced legislation that would take an incremental step by exempting capital gains income from taxes.
While the push to eliminate income tax is gaining momentum in some states, it remains to be seen how this will impact their economies and the lives of their residents. As states navigate the uncertain waters of fiscal policy, the balance between tax cuts and maintaining essential services will be a critical factor in their future prosperity.
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