Bye-bye paycheck taxes? Mississippi and Kentucky plan to eliminate state income tax for first time in decades

In a move that could reshape the way Americans are taxed at the state level, Mississippi and Kentucky have launched ambitious plans to eliminate personal income taxes—something no US state has done in more than four decades.The last time this happened was in 1980, when oil-rich Alaska scrapped its income tax. Now, with budget surpluses following the Covid-19 pandemic and a national trend toward tax relief, the deep South is aiming for a repeat.The Mississippi experimentGovernor Tate Reeves of Mississippi has signed into law a roadmap to phase out the state’s 4% income tax—starting with a drop to 3% by 2030, followed by conditional cuts tied to revenue growth. If all benchmarks are met, Mississippi could become income-tax free by 2040. The plan also includes a sales tax cut on groceries and a hike in gas taxes.“This puts us in a rare class of elite, competitive states,” Reeves said, referencing income tax-free states like Florida and Texas. “We have the potential to be a magnet for opportunity.”But the plan comes with high stakes. Mississippi remains one of the poorest states in the country and heavily depends on federal funding. Critics say losing income tax revenue could cripple public services if federal aid is reduced.“This is a huge percentage of what the state brings in to fund schools, health care, and other essentials,” warned Neva Butkus of the Institute on Taxation and Economic Policy.Kentucky’s more cautious routeKentucky, too, is eyeing zero income tax—but with a slower, more hands-on approach. A 2022 law allows income tax reductions only if revenue meets specific targets and the state legislature approves each step.The income tax is set to drop to 3.5% in 2026. A second new law allows smaller cuts even when revenues fall short of larger targets—something Democratic Governor Andy Beshear criticized as a “bait-and-switch.”Despite his concerns, Beshear signed off on the 2026 tax cut, while letting the second bill become law without his signature.The bigger trendMississippi and Kentucky join a growing group of states challenging traditional taxation models. Oklahoma lawmakers recently advanced a bill to wipe out income taxes based on revenue triggers. Missouri is weighing a capital gains exemption. And states like New Hampshire and Tennessee have recently eliminated taxes on dividends and interest.But experts say wiping out income taxes after decades of dependence is far harder than never adopting them at all.“It’s a lot easier if you’ve never levied one,” said Katherine Loughead of the Tax Foundation. “Once you rely on that money, phasing it out is much more complicated.”With economic clouds looming—from Trump-era tariff tensions to potential federal funding cuts—states may soon find out whether their tax-cutting gambles pay off or leave them in a fiscal crunch.