Missouri Governor Mike Kehoe said the state's current tax system is no longer suited to today's economy and should be thoroughly reformed by abolishing the individual income tax and broadening the sales tax base to cover more internet-based commercial activities.

At first glance, this proposal seems quite business-friendly. Janelle Fritts, a policy analyst at the Tax Foundation, a research think tank based in Washington, noted that for businesses wanting employees to regularly come into the office or work nearby, recruiting may be easier if they locate in a state with low or no income tax.

However, the part of the plan that compensates for lost revenue by expanding Missouri's sales tax could also adversely affect some business owners.

In an interview, Fritts said large internet companies already collect and remit state taxes, so the impact of broadening Missouri's sales tax may fall more on relatively smaller local Missouri businesses—they will bear additional compliance costs and face pressure to pass the new costs on to consumers.

Local businesses will for the first time need to pay tax on electronic services, such as customer relationship management software, and will likely pass this sales tax on to customers. Meanwhile, Missouri consumers may also face higher online subscription fees, which could dampen rather than stimulate economic activity.

The Republican governor outlined his tax reform plan in his State of the State address on January 13.

"Missouri's tax system was designed for the past 100 years," Kehoe said in the speech. "Today, much of our commerce is conducted through monthly subscriptions and digital services, such as online advertising, e-books, and artificial intelligence platforms, which are not in the current sales tax base. Their billionaire owners do not pay taxes on them."

Kehoe believes reforming the state tax system can stimulate economic activity and make Missouri more competitive.

Fritts said cutting or fully eliminating the income tax would help pass-through entities such as sole proprietorships based in Missouri, because such businesses typically report business income on the owner's state individual income tax return. She noted that lower rates mean a lighter tax burden for owners.

Jared Walczak, a senior fellow at the Tax Foundation, cautioned that if the tax Kehoe envisions does extend to electronic services such as online advertising, then a business headquartered in Missouri would need to pay tax on ads displayed in Missouri and in all other states, such as neighboring Kansas.

Walczak further explained that, meanwhile, a business located in Kansas would not need to pay tax on ads displayed in Missouri, because like most state sales taxes, Kansas's sales tax follows the destination principle, which determines taxing jurisdiction based on where the good or service is consumed or benefits.

Fritts believes abolishing the state income tax should not be the ultimate goal; instead, states should consider building a tax system that promotes economic growth.

Although Georgia is also considering eliminating its income tax, the more common trend among states in 2026 is lowering income tax rates or moving to a flat tax. For example, Nebraska, North Carolina, and Pennsylvania cut their corporate income tax rates on January 1.

Moreover, many state governments rely heavily on income tax revenue: according to Tax Foundation data, individual income taxes accounted for 33% of state tax revenue in fiscal year 2023. Data show that Missouri's individual income tax revenue was 30.6% of its total revenue in fiscal year 2022.

"Replacing that revenue is a formidable task," Fritts said.