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.
I don’t think the story will end well in Kentucky of Mississippi but Kansas had some existing problems that often get tied-in with Kansas’ tax reduction.
The people writing the checks for government expenditures were not following the budget submitted by the legislature. There was literally someone cutting checks based on what he felt was good policy. For years and years. He died. We only figured out the problem after he died and it turned out he was giving schools and school transportation a lot more money than he was supposed to. The Legislature would have made different spending decisions had they correct information abut the state of the budget. Massive oversight on the part of several administrations.
Kansas has poorer farmland than Iowa & Nebraska. Kansas has less oil than Oklahoma. And Kansas doesn’t have tourism like Colorado. Relative to our neighbors, we will continue to get poorer and poorer. The economic engine of Kansas (Kansas City) is split between two states and the “border war” frequently results in business playing both sides off each other until they get a deal so cheap that neither side should make the offer.
Kansas City is the economic engine of Kansas. The tax cuts reduced government spending (mostly school spending) in rural parts of the state. The tax savings was pocketed in a city where a lot of the money walked across the border. The overall state couldn’t make-up for what was being lost through that siphon but this may be a problem dissimilar to other states.
All that said, I do think good public policy is to have a wide but shallow system of taxation. Meaning that a state uses every type of tax (income, sales, property, estate, capital gains, etc.) but also tries to keep each tax relatively low so that the tax itself does not become the source of economic disruption. I feel like states that take one tax to zero but make it up with another tax are making things worse.