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In an unprecedented move for the U.S., two Southern states, Mississippi and Kentucky, are on a path to eliminate their income taxes on wages for the first time in decades. As state economies rebound with booming revenues post-pandemic, these states etg ambitious goals to phase out income taxes entirely. While tax cuts are often viewed as a sign of economic optimism, some experts warn of potential risks, including heavy reliance on other forms of taxation.
Mississippi’s Path to Income Tax Elimination
Mississippi is leading the charge with its bold strategy to gradually phase out its 4% state income tax. Signed into law by Republican Governor Tate Reeves, the measure will reduce the state’s income tax rate to 3% by 2030. If state revenue growth targets are met, Mississippi could see its income tax fully eliminated by 2040. To make up for this revenue shortfall, the law also raises the gasoline tax and reduces sales taxes on groceries.
Supporters of the bill argue that eliminating the income tax will stimulate the state’s economy, drawing both businesses and residents away from higher-tax states like California and Illinois. “This puts Mississippi in a rare class of elite, competitive states,” said Governor Reeves, highlighting the potential for attracting investment, talent, and families looking for a more favorable tax environment.
However, critics, especially Democrats, warn that Mississippi’s heavy reliance on federal funding for essential services like education and healthcare makes the state vulnerable. The state already has one of the highest poverty rates in the U.S., and income tax cuts could deepen the financial strain if federal funding is reduced or if the tax cuts fail to generate enough additional sales tax revenue.
Kentucky’s Income Tax Reforms: A More Cautious Approach
Kentucky is also moving towards eliminating its income tax, but with a slightly different approach. The state’s Republican-led legislature passed a law in 2022 reducing the income tax from 5% to 4%. A series of revenue-based triggers will allow the tax to decrease incrementally, but the General Assembly must approve each reduction. This makes the process less automatic than Mississippi’s approach.
In 2023, Kentucky lawmakers passed two more tax reform bills. The first reduces the income tax rate to 3.5% starting in 2026, while the second allows for smaller, incremental reductions if revenue targets aren’t met. Although Governor Andy Beshear, a Democrat, signed the bill for the 2026 tax cut, he expressed concern about the long-term consequences of altering the tax structure. Beshear described the second bill as a “bait-and-switch,” claiming it undermines previously agreed-upon restrictions on tax cuts.
While Kentucky’s cautious strategy may seem more measured, the state faces similar concerns as Mississippi, particularly in terms of how the state will balance its budget and fund essential services without the revenue from income taxes.
Wider Trend: More States Consider Income Tax Cuts
The push to eliminate income taxes is not confined to Mississippi and Kentucky. Several other states are also exploring similar moves, including Oklahoma and Missouri. In March 2025, Oklahoma’s House passed legislation to gradually cut its income tax to zero, contingent on meeting certain revenue growth benchmarks. Meanwhile, Missouri’s Governor Mike Kehoe has expressed interest in phasing out the income tax altogether, with legislation already advancing in the state legislature.
In states like Tennessee and New Hampshire, where no income tax on wages currently exists, lawmakers have moved to eliminate taxes on interest, dividends, and capital gains, as seen with Tennessee’s 2021 repeal of its tax on investment income.
The increasing trend of income tax elimination raises questions about how states will handle the fiscal challenges that could arise. States will need to find alternative ways to generate revenue, which could lead to an increased reliance on sales taxes and other regressive taxes that disproportionately affect low-income residents.
The push to eliminate income taxes represents a bold vision for states like Mississippi and Kentucky, positioning them as tax havens in a post-pandemic economy. However, as these states move forward with their tax reforms, they will need to carefully monitor their budgets and consider the long-term consequences for residents and businesses alike.
As more states join the movement to eliminate income taxes, the broader question remains: How will states balance the need for tax cuts with the financial realities of funding essential public services? Will the economic growth promised by these tax cuts be enough to offset potential revenue losses?
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