It’s not every day — or even every decade — that voters are presented a decision like this: Should the state’s individual income tax be eliminated?
When that question appears on a Missouri ballot later this year, it will mark the first time since the modern income tax began over a century ago that a U.S. state legislature has asked voters whether to eliminate the tax. If they say “yes,” they will also be authorizing a sales tax expansion.
Missouri’s unique proposal caps a five-year tax-cutting binge in states that flourished while governments were flush with cash during the recovery from the COVID-19 pandemic and only recently abated as some Democratic-led states embraced higher tax rates on millionaires. During that time, almost every state made either permanent or temporary reductions to some type of tax, whether on income, sales, property or gas. And more than half the states that levy income taxes reduced their top tax rate.
Those tax cuts seldom were offset by increasing other types of taxes. But Missouri’s new measure implicitly acknowledges that it’s hard to eliminate an income tax without raising other revenues to keep government running.
When did the income tax begin?
Congress gained the power to tax income with the ratification of the 16th Amendment in 1913. Many states adopted their own income taxes over the ensuing years, including Missouri in 1917.
But some states — Florida, Nevada, South Dakota, Texas and Wyoming — never adopted an individual income tax, instead relying on sales taxes, oil taxes or other sources. New Hampshire and Tennessee, which taxed income from interest and dividends but not wages, each ended those taxes within the past five years.
Alaska is the only state so far to impose a general individual income tax and then repeal it. Lawmakers eliminated the tax in 1980 while rich with oil revenues.
Massachusetts voters rejected an income tax elimination in 2008 and 2002. But those ballot measures were initiated by citizens, not lawmakers responsible for building the state budget.
Which states are trying to phase out their income tax?
A 2022 Kentucky law reduced the state’s income tax rate and set a series of revenue-based benchmarks that could gradually lower the tax to zero. It also expanded the sales tax to some services, such as personal fitness training and website design. But the revenue triggers aren’t automatic, meaning the General Assembly must approve each additional income tax rate reduction.
A Mississippi law enacted last year gradually reduces the income tax rate from 4% to 3% by 2030 and sets revenue growth benchmarks that could trigger additional cuts. It could take over a decade to eliminate the tax, if all the benchmarks are hit.
Oklahoma also enacted a law last year that would trigger gradual income tax rate reductions based on revenue growth, until the tax is phased out. But the state won’t know until next year whether it’s met the revenue mark to trigger the first tax-rate reduction.
South Carolina joined the trend a month ago, when Republican Gov. Henry McMaster signed law a that could eventually phase out the individual income tax as revenues grow.
What does the Missouri proposal say?
Missouri’s proposed constitutional amendment directs the General Assembly to eliminate the individual income tax through gradual reductions based on revenue growth. To spur that along, it gives lawmakers the authority to raise revenues by imposing the sales tax on “any goods and services” — sidestepping a constitutional ban on expanding the sales tax base that voters approved in 2016.
The legislature would have five years to decide which additional sales to tax without needing another vote of the people.
But some voters may not realize they are authorizing more sales taxes. The ballot wording asks whether to phase out the income tax and “modify” the sales tax — avoiding the words “increase” or “expand.”
The amendment, which was approved last week by the legislature, will appear on the November ballot, unless Republican Gov. Mike Kehoe sets an election sooner.
A businessman explains his move
Kehoe has made the individual income tax repeal a priority, arguing it will spur the economy while attracting businesses and new residents.
At a House committee hearing earlier this year, Will Spartin said he attended business college in St. Louis but located the headquarters of his beverage businesses in Florida because that state has no individual income tax. He would love to return to Missouri, but only if it makes financial sense, Spartin said.
“If Missouri moves in this direction, even gradually, it would be a meaningful signal to people like us that Missouri wants to compete for modern industries,” Spartin told lawmakers.
A retiree raises sales tax concerns
Retired elementary school teacher Sharon Wells, of suburban St. Louis, said she paid a few hundred dollars in state income tax this past year. She’s worried her overall tax bill could rise if the income tax is replaced with a broader sales tax.
Wells pays someone to mow her lawn. She goes to a hair salon twice a month. She has periodic medical and dental visits and car that needs maintenance. None of those services currently are taxed. But they all could be under the Missouri proposal.
“I think it’s a huge mistake,” she said. “We’re already paying far more than we have in the past for groceries, medicine, all kind of services. Everything has gone up.”
What does the data say?
A family earning between $49,000 and $78,000 annually would pay an average of $535 more in taxes if Missouri’s income tax is repealed and replaced with higher sales taxes, according to an estimate by the nonprofit Institute on Taxation and Economic Policy. Those earning less would pay even more, the group said.
“Pretty clearly, this is going to be a tax increase for most people,” said Carl Davis, the institute’s research director.
Other data suggest that income tax policies — though not the primary motivation — can play a role in attracting people to states. Texas, Florida and Tennessee all ranked in the top five for net interstate migration of federal income tax filers in 2023, while the higher-tax states of California, New York and New Jersey ranked near the bottom, according to an analysis of IRS data by the nonprofit Tax Foundation.
If Missouri’s referendum is approved by voters, “it could embolden other states to accelerate their own planned income tax reductions,” said Katherine Loughead, the foundation’s director of state tax projects.
