Efforts to eliminate income tax on wages and salaries are gaining momentum in the United States, with Mississippi and Kentucky setting the stage for potentially significant changes. This move is part of a broader trend of tax reductions across states, fueled by robust economic recovery and substantial budget surpluses following the COVID-19 pandemic. However, the push for tax elimination comes amid economic uncertainties as states anticipate potential federal funding cuts and broader economic impacts from President Donald Trump’s fiscal policies and tariffs. Analysts caution that removing income taxes might increase reliance on other sources of revenue, such as sales taxes, which often disproportionately impact low-income individuals.
The 16th Amendment of the U.S. Constitution, ratified in 1913, authorized Congress to impose income taxes. Most states subsequently adopted their own income tax systems. Currently, eight states do not levy a personal income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Washington state taxes certain capital gains income but not wages and salaries. Alaska was the last state to repeal its income tax in 1980, driven by substantial oil revenues. The challenge of eliminating an income tax is recognized, especially for states that have become dependent on this revenue stream.
In Mississippi, the administration under Republican Governor Tate Reeves has enacted legislation to gradually reduce the state’s income tax rate from 4% to 3% by 2030. The plan includes benchmarks for state revenue growth, which, if met, could trigger further cuts until the tax is completely phased out by 2040. The law also reduces sales tax on groceries and increases the gasoline tax. Proponents believe that eliminating the income tax could make Mississippi more attractive to businesses and residents, potentially revitalizing the state’s economy. However, concerns remain about the financial risks of reduced federal funding coinciding with state tax cuts, particularly given Mississippi’s reliance on federal aid.
Kentucky’s approach, initiated by a 2022 law, involves reducing the state’s income tax rate with revenue-based triggers for further reductions. Unlike Mississippi, Kentucky’s reductions require legislative approval for each cut. Recent laws have facilitated these reductions, setting the stage for a tax rate decrease from 4% to 3.5% by 2026. The process for future reductions has been simplified, although Democratic Governor Andy Beshear has expressed concerns about removing safeguards originally intended to guide the tax cuts.
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Other states are considering similar measures. New Hampshire and Tennessee have already ceased taxing income from interest and dividends, aligning with their policy of not taxing wages. Oklahoma’s House has passed a bill to eliminate personal income tax contingent on revenue growth, and Missouri is exploring exemptions for capital gains income as a step toward broader tax reform.
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- Residents in states pursuing income tax elimination could see an increase in disposable income, potentially boosting local economies through increased consumer spending.
- The shift away from income tax reliance may lead to higher sales or property taxes, impacting the cost of living, particularly for lower-income households.
- Changes in tax policy could affect state funding for public services, such as education and healthcare, which may result in altered service availability or quality.
- States eliminating income taxes might become more attractive to businesses and individuals, influencing migration patterns and economic development.
- Ongoing economic uncertainties, including potential federal funding cuts, could impact the long-term sustainability of these tax policy changes, necessitating careful fiscal planning.