In a bold shift in fiscal policy, Mississippi and Kentucky have unveiled major tax reforms aimed at eliminating personal income taxes—an action unseen in the US since Alaska ended its income tax in 1980. These southern states are joining a national wave focused on tax relief and economic competitiveness.
Mississippi’s Roadmap to Zero Income Tax
Governor Tate Reeves of Mississippi recently signed legislation outlining a step-by-step plan to completely phase out the state’s 4% income tax by 2040. The plan begins with a reduction to 3% by 2030 and includes further conditional cuts based on revenue benchmarks.
Key changes under Mississippi’s plan:
- Income tax phase-out: 4% reduced gradually to 0% by 2040
- Grocery sales tax: Proposed reduction to support lower-income households
- Gas tax: Proposed hike to offset revenue losses
Reeves stated, “This puts us in a rare class of elite, competitive states,” referencing income-tax-free states like Florida and Texas.
However, critics argue the risks are steep. Mississippi is one of the country’s poorest states and relies heavily on federal aid. Tax experts like Neva Butkus from the Institute on Taxation and Economic Policy warn that slashing income tax revenue may threaten funding for essential public services like education and healthcare.
Kentucky’s Gradual and Conditional Approach
Kentucky is taking a more measured route. A 2022 law enables income tax reductions only when state revenues meet specific targets. The state’s current plan is:
- 2026: Income tax rate to drop to 3.5%
- Further cuts: Possible if revenue thresholds are met and legislative approval is secured
A recent law also permits smaller cuts even when financial benchmarks aren’t fully achieved—an approach Democratic Governor Andy Beshear has described as a “bait-and-switch.” Though critical, Beshear allowed the new law to take effect, signaling cautious endorsement.
A Broader National Trend
Mississippi and Kentucky’s efforts are part of a larger movement toward tax reform:
- Oklahoma is considering a bill to end income tax using revenue-based triggers
- Missouri may introduce capital gains exemptions
- New Hampshire and Tennessee have already eliminated taxes on interest and dividends
Yet, experts like Katherine Loughead of the Tax Foundation caution that removing a long-standing revenue stream is not easy. “Once you rely on that money, phasing it out is much more complicated,” she noted.
Conclusion
Mississippi and Kentucky’s aggressive tax reform strategies could redefine state-level fiscal governance. While the promise of economic growth and tax relief is appealing, the true test will be sustainability. With looming economic uncertainties, the success or failure of these initiatives may shape future tax policy across the United States.
FAQs
When was the last time a US state eliminated income tax?
The last instance was in 1980 when Alaska eliminated its state income tax.
What is Mississippi’s target for becoming income tax-free?
Mississippi aims to eliminate its state income tax completely by 2040.
How will Kentucky reduce its income tax?
Kentucky plans conditional tax reductions, with the next drop to 3.5% scheduled for 2026.
Are other states pursuing similar tax reforms?
Yes, states like Oklahoma, Missouri, Tennessee, and New Hampshire are also pursuing tax relief strategies.
What are the risks of eliminating income taxes?
Potential risks include reduced funding for public services and increased reliance on federal aid or other state taxes.
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Aanchal is a passionate writer with a keen interest in storytelling, content creation, and creative expression. She enjoys exploring diverse topics and crafting engaging narratives that captivate readers.