About 45 years have passed since a U.S. state last eliminated its income tax on wages and salaries. But with recent actions in Mississippi and Kentucky, two states now are on a path to do so, if their economies keep growing. The push to zero out the income tax is perhaps the most aggressive example of a tax-cutting trend that swept across states as they rebounded from the COVID-19 pandemic with surging revenues and historic surpluses. But it comes during a time of greater uncertainty for states, as they wait to see whether President Donald Trump’s cost cutting and tariffs lead to a reduction in federal funding for states and a downturn in the overall economy. Some fiscal analysts also warn the repeal of income taxes could leave states reliant on other levies, such as sales taxes, that disproportionately affect the poor. Which governments charge income tax? The 16th Amendment to the U.S. Constitution grants Congress the power to levy income taxes. It was ratified by states in 1913. Since then, most states have adopted their own income taxes. Eight states currently charge no personal income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas and Wyoming. A ninth state, Washington, charges no personal income tax on wages and salaries but does tax certain capital gains income over $270,000. When Alaska repealed its personal income tax in 1980, it did so because state coffers were overflowing with billions of dollars in oil money. Though income tax eliminations have been proposed elsewhere, they have not been successful. “It’s a lot easier to go without an individual income tax if you’ve never levied one,” said Katherine Loughead, a senior analyst and research manager at the nonprofit Tax Foundation. “But once you become dependent on that revenue, it is a lot more difficult to phase out or eliminate that tax.” What is Mississippi doing? Republican Mississippi Gov. Tate Reeves recently signed a law gradually reducing the state’s income tax rate from 4% to 3% by 2030 and setting state revenue growth benchmarks that could trigger additional incremental cuts until the tax is eliminated. The law also reduces the sales tax on groceries and raises the gasoline tax. If cash reserves are fully funded and revenue triggers are met each year, Mississippi’s income tax could be gone by 2040. Supporters of an income tax repeal hope it will attract both businesses and residents, elevating the state’s economy to the likes of Florida, Tennessee and Texas. Their theory is that when people pay less in income taxes, they will have more money to spend, thus boosting sales tax collections. The tax repeal “puts us in a rare class of elite, competitive states,” Reeves said in a statement. 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.” Mississippi is among the most impoverished states and relies heavily on federal funding. Democratic lawmakers warned the state could face a financial crises if cuts in federal funding come at the same time as state income tax reductions. 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,” said Neva Butkus, senior analyst at the nonprofit Institute on Taxation and Economic Policy. What has […]