How States are Eliminating the Personal Income Tax

In a generational effort to embrace liberty, drive economic growth, and reduce government’s intrusion into everyday life, several states are attempting to do what many have long thought was impossible: eliminate their personal income taxes.

Three states, Kentucky, Mississippi, and Oklahoma, have legislated the end of their income taxes. While other states have repeatedly cut taxes in recent years and their leaders have suggested that the elimination of the tax be the goal, only these three have written the conditions of such an end into law.

The economic consequences of such a change have been explored in ALEC research for nearly two decades: The Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index examines 15 variables critical to economic competitiveness. Over 18 editions, it has found that states getting these policy levers right can better compete for workers, businesses, and capital. Personal income taxes are a key factor, and it is thus no surprise that the states with fewer of these taxes rank well in edition after edition.

Of the states that impose fewer personal income taxes, only Washington (which imposes a capital gains tax but no tax on wage income) ranks outside of the top 25 for Economic Outlook in the latest edition. Comparisons of the nine states without personal income taxes on wages (including Washington) have been published in each version of Rich States, Poor States, showing the former consistently outperforming the latter and national averages.

The states that create environments for prosperity benefit from virtuous cycles, as investment and migration bring further growth. States like Oklahoma, Mississippi, and Kentucky are learning these lessons from our federalist system. Observing the importance of income taxes and the general economic successes of the states without them, they are charting a path to help bring some of that prosperity to their residents.

The statutes set to eliminate income taxes in Kentucky, Mississippi, and Oklahoma have all followed the same basic principle: When the state has extra funds available, the first use of them should be to put money into taxpayer pockets, prioritizing reducing income tax rates over increasing government spending. The differences, then, are based on how the states determine whether funds are available, and by how much tax rates should be reduced. The mechanisms used to answer those questions are called “triggers.”

Kentucky began its path toward the elimination of its personal income tax in 2022 with HB8. Passed over the veto of Gov. Andy Beshear, this bill laid out a set of conditions that would trigger income tax reductions of 0.5 percentage points, eventually setting the rate to zero percent. The income tax was lowered for 2023 based on those triggers, but subsequent cuts required legislative authorization. The conditions were again met in 2024 to trigger another reduction, which was authorized by the legislature. The conditions were not met in 2025. But earlier this year, the legislature confirmed that conditions had been met for a reduction in 2026, authorizing the state’s flat rate to fall to 3.5% starting Jan. 1.

Mississippi took a similar approach this year, enacting HB1, which will reduce the state’s income tax to 3% by 2030 and use triggers to lower it further in subsequent years.

Kentucky and Mississippi both consider the status of their reserve funds in their trigger mechanisms. In Kentucky, the budget reserve trust fund must total at least 10% of general fund revenue for an income tax cut to occur. In Mississippi, the state must have deposited at least 10% of general fund appropriations from that year into its working cash stabilization fund. As is true for any family, the responsible course for states is to ensure money is saved for a rainy day.

If these conditions for reserves are met, both states then look at the relationship between appropriations and revenue to determine if a cut will occur. In Kentucky, the trigger is activated if, at the end of a fiscal year, the difference between general fund revenues and appropriations is at least the amount of revenue foregone by a full point reduction to the income tax. The final step in Kentucky is for the legislature to authorize that these conditions have been met to initiate the half-point reduction in the income tax. Kentucky is the only one of these three states to require further legislative action for the rate to be lowered.

Mississippi allows for differently sized surpluses to trigger differently sized tax cuts. The difference between revenue and appropriations must be at least 85% of the cost of a one-point reduction to initiate a 0.2-point reduction. If that difference is between 100% and 115% of the cost of that one-point reduction, the rate is reduced by 0.25 points. If it is more than 115% of the cost, then the rate is reduced by 0.3 points. The Mississippi legislation also specifies that once the personal income tax rate reaches zero, it is explicitly eliminated. While simply a formality, this provision means that any resumption of income taxes would require the legislature to re-enact such a tax.

Oklahoma’s HB 2764, signed into law in May of 2025, reduces the state’s top income tax rate to 4.5% starting next year and allows its trigger to continue the reductions all the way to zero. The Sooner State’s method of triggers operates on the same principles as Kentucky and Mississippi, but is based on the growth of revenue, rather than the relationship between revenue and appropriations. If the state’s total revenue for a fiscal year is greater than the largest previous amount plus 1.25 times the amount that would be foregone by a 0.25-point income tax cut, then the income tax rates are reduced by 0.25 points. Unlike Mississippi and Kentucky, Oklahoma’s trigger mechanism does not include a requirement related to reserve funds. The state’s leaders have funded its reserves, but consideration of their contributions or levels is not included in the trigger for tax cuts.

As these states serve as important models for the nation, it is worth examining the difference between the revenue-based Oklahoma method and the appropriations-based Kentucky-Mississippi method. The latter could allow a wasteful budget to squander taxpayer dollars and reduce or eliminate planned rate reductions. But the inverse is also true: A frugal budget would shrink appropriations, increase the amount of excess funds, and speed up income tax elimination. This Kentucky-Mississippi method thus leaves more room for budgeting decisions to accelerate or impede elimination.

The Oklahoma method is instead directed by revenue levels. The pace of income tax cuts will, in large part, be directed by economic growth, which leads to revenue growth. When revenue grows quickly, some of the increase will be directed to income tax cuts. But if revenue grows slower than planned, the pace of cuts will decelerate or halt completely. There is far less agency involved in this approach, which has the benefit of mostly taking political considerations out of the equation. The inverse of this, though, means that just as politics or spending can’t prevent rate cuts, it also cannot create them. If, for example, revenue growth is too modest to trigger a cut, but leaders can slow spending growth or even shrink government to deliver savings, such action cannot trigger an income tax reduction under the Oklahoma method; it could under the Kentucky-Mississippi method.

In the most optimistic scenarios, Kentucky could see its income tax eliminated by 2033, Mississippi by 2040, and Oklahoma by 2044. In the coming years, we will observe these triggers in action and gain more evidence on their effectiveness. We may see those triggers adjusted or rates lowered at an accelerated pace. More states may consider joining the trend, taking note of the various approaches.

Americans don’t pay taxes because it’s fun. We do it because taxes are necessary to fund the core services of government. We should ask why we still pay these taxes if it seems that some states are better off without them. In Kentucky, Mississippi, and Oklahoma, leaders have done just that and answered that their residents are better off without them. It is a remarkable trend in state policy, showing that the growth of government need not be inevitable. Policymakers can instead prioritize taxpayers’ wallets and the free market.