No state has ended personal income tax since 1980, but Mississippi and Kentucky may change that

It has been about 45 years since the US state last eliminated income taxes on wages and salaries. But as recent actions in Mississippi and Kentucky continue to grow, two states are on the path to do so.

Promoting to zero income tax is perhaps the most aggressive exampleTaxation trendsIt swept the state when they rebounded from the Covid-19 pandemicSurge in revenueandHistorical excess.

But that happens in a time of greater uncertainty for the state.President Donald Trump cuts costsandCustomsIt will lead to a cut in federal funds in the state and a recession throughout the economy.

Some fiscal analysts also warn that the abolition of income tax could leave states dependent on other tax levies that disproportionately affect the poor.

Which government charges income tax?

The 16th amendment to the US Constitution grants Congress the authority to collect income taxes. It was ratified by the state in 1913. Since then, most states have adopted their own income tax.

Currently, eight states do not charge personal income taxes: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas and Wyoming. Washington State 9 does not charge personal income tax on wages and salaries, but does tax certain capital gains incomes above $270,000.

When Alaska abolished the personal income tax in 1980, he did so because the state’s financial resources were flooded with billions of dollars of oil money.

Removal of income taxes has been proposed elsewhere but has not been successful.

“We’ve seen a lot of people who have been working hard to get started,” said Katherine Lerhead, senior analyst and research manager at the Nonprofit Tax Foundation. “But it’s much more difficult to abolish that tax or eliminate that tax if you rely on that revenue.”

What does Mississippi do?

Republican Mississippi Gov. Tate Reeves has recently signed a law that gradually lowers the state’s income tax rate from 4% to 3% by 2030, setting a state’s revenue growth benchmark that could cause additional incremental cuts until the tax is removed. The law also reduces sales tax on food and raises gasoline tax.

If cash reserves are fully funded and revenue triggers are met each year, Mississippi’s income tax could disappear by 2040.

Income tax advocates hope it will attract both businesses and residents and boost the state’s economy to Florida, Tennessee, Texas and others. Their theory is that when people pay less income tax, they will use more money, which will encourage sales tax collection.

The abolition of taxes “puts us into a rare class of elite competitive state,” Reeves said in a statement. He added: “Mississippi could become a magnet for opportunities, investments and talent, and for families looking to build a better life.”

Mississippi is one of the poorest statesIt relies heavily on federal funds. Democrats warned that if federal funding cuts come along with state income tax cuts, the state could face a financial crisis.

Income taxes “provides a large portion of what the state brings to fund schools, healthcare and services that everyone depends on,” says Neva Butkus, a senior analyst at the nonprofit Institute for Taxation and Economic Policy.

What did Kentucky do?

Kentucky’s 2022 law set up a series of revenue-based triggers that could lower the state’s income tax rate and gradually reduce the tax to zero. However, unlike Mississippi, the trigger is not automatic. Rather, the Kentucky legislature must approve an additional reduction in tax rates.

This has led to a series of tax reduction measures, including two new laws this year. One implements the next tax rate reduction from 4% in 2026 to 3.5%. Second, if revenue growth is not sufficient to trigger a 0.5 percentage point reduction, it will be easier to make future tax rate cuts easier.

Andy Besher of the Democratic government signedTax cut law next yearHowever, other measures passed by the Republican-led Congress will become law without his signature. Beshear called it the “bait and switch” bill, and competing lawmakers ensured that guardrails continue for income tax cuts while pushing for the 2026 tax cuts, and then changed the triggers for future years after the session.

What actions do other states take?

New Hampshire and Tennessee already did not tax income from wages or salaries, but both states were taxed on certain types of income.

In 2021, Tennessee ended its income tax on interest from bonds and stock dividends that had been collected since 1929.

New Hampshire suspended taxes on interest and dividends earlier this year.

Some other states are also pushing to abolish income taxes. Oklahoma passed the law in March, gradually reducing its personal income tax rate to zero if the revenue growth benchmark is met. The bill is currently in the Senate.

Republican New Missouri Gov. Mike Kehoe also wants to phase out the income tax. The House and Senate have advanced laws that take incremental stages by exempting capital gains from taxes.

This story was originally introduced Fortune.com