In a significant move that could potentially transform the American taxation landscape at the state level, the states of Mississippi and Kentucky have embarked on ambitious plans aimed at phasing out personal income taxes. This initiative marks a rare occurrence in U.S. history, as no state has eliminated its income tax in more than four decades. The last state to undertake such a bold step was Alaska in 1980, when the state, buoyed by oil revenue, abolished its income tax altogether. Now, in the wake of budget surpluses following the COVID-19 pandemic and a growing national sentiment favoring tax relief, Mississippi and Kentucky are looking to replicate that success.

Mississippi's Governor, Tate Reeves, has recently signed into law a comprehensive plan to gradually eliminate the state’s current 4% income tax rate. This reduction is set to begin with a decrease to 3% by the year 2030. The legislation includes a provision for future cuts, contingent on the state’s revenue growth, meaning that if certain financial benchmarks are met, Mississippi could potentially become completely income-tax-free by 2040. Alongside this income tax reduction, the plan also proposes a cut in sales tax on groceries and an increase in gas taxes, which raises questions about the overall impact on the state's economy.

Governor Reeves expressed optimism about this ambitious approach, stating, “This puts us in a rare class of elite, competitive states,” as he referenced states like Florida and Texas that do not impose personal income taxes. He added, “We have the potential to be a magnet for opportunity.” However, this bold initiative carries significant risks, particularly given Mississippi’s status as one of the poorest states in the nation, which heavily relies on federal funding. Detractors of the plan, including Neva Butkus from the Institute on Taxation and Economic Policy, have raised concerns about the potential fallout from losing income tax revenue. Butkus warned, “This is a huge percentage of what the state brings in to fund schools, health care, and other essentials,” emphasizing the critical nature of maintaining stable funding for public services.

Similarly, Kentucky is contemplating a similar zero income tax initiative, yet its approach is more cautious and methodical. Under a law enacted in 2022, Kentucky’s income tax reductions can only occur if revenue meets predetermined targets and is subsequently approved by the state legislature at each stage. Currently, the state’s income tax is scheduled to decrease to 3.5% by 2026. Furthermore, a second new law permits smaller tax cuts even if the revenues fall short of the more ambitious goals, a move criticized by Democratic Governor Andy Beshear as a “bait-and-switch.” Despite his reservations, Governor Beshear signed off on the planned 2026 tax cut while allowing the second bill to become law without his endorsement.

Both Mississippi and Kentucky join a growing coalition of states that are challenging traditional taxation models. Lawmakers in Oklahoma have recently advanced a proposal to eliminate income taxes based on specific revenue conditions, while Missouri is contemplating a capital gains exemption. Additionally, states like New Hampshire and Tennessee have taken steps to eliminate taxes on dividends and interest.

However, experts caution against the feasibility of eliminating income taxes after decades of reliance on this revenue source. Katherine Loughead from the Tax Foundation highlighted the inherent challenges by stating, “It’s a lot easier if you’ve never levied one. Once you rely on that money, phasing it out is much more complicated.” As economic uncertainties loom—ranging from the lingering impacts of Trump-era tariffs to possible reductions in federal funding—these states may soon discover whether their bold tax-cutting gambles will yield favorable results or lead them into a fiscal quagmire.