Gov. Mike Kehoe's tax reform plan heard in House Committee - AIM supports with caveats

Speaker of the House Jon Patterson

January 29, 2026 - Governor Mike Kehoe called for an overhaul of the tax system used to fund state government in his State of the State Address. His plan is to eliminate the individual income tax and replace those revenues with an expansion of the sales tax base (taxing transactions that are not taxed today) and an increase in the sales/use tax rate. The plan was filed as HJR 173 (Davidson) and HJR 174 (Speaker Patterson) in the Missouri House and those resolutions were heard on Wednesday.

Associated Industries of Missouri (AIM) president and CEO Ray McCarty testified in favor of advancing both joint resolutions that would present the question to voters. But McCarty cautioned the Committee that this support was dependent on having a plan to replace the revenue before the issue is referred to voters.

"Associated Industries of Missouri wants to go on record in support of the resolutions with a very important caveat," said McCarty. "We think it is very important to figure out what the replacement revenues are going to be, and the sources of those revenues, before we complete the process on the joint resolutions. The reason is details matter."

McCarty explained approximately 90% of businesses currently pay their business taxes through individual income tax and removing the tax would eliminate their income tax burden. But McCarty said when determining the impact on businesses overall, "we need to look at other states that have eliminated their income taxes to see how they made up the revenue." McCarty said while most use sales/use taxes as a major source of revenue, many of those states have other business taxes that are higher than those taxes in Missouri under current law.

McCarty said there were reasons other than individual income taxes that Missouri may be losing economic development opportunities to other states, including right-to-work. After the Missouri General Assembly passed a right-to-work law, supported by AIM, labor unions were successful in referring the bill to voters who rejected that proposal and it did not become law. McCarty said some companies will not locate in a state that is not a right-to-work state.

McCarty said Missouri was competitive in many criteria that are considered by site locators when determining where to locate or expand their client businesses. When compared with states that have no individual income tax (AL, FL, NV, NH, SD, TN, TX, WA and WY), Missouri has a lower cost of living than all of them. The share of state and local taxes paid by businesses is also lower in Missouri than in any of those states. Missouri's corporation income tax rate of 4% is also the lowest among those non-individual income tax states that have a corporation income tax.

While McCarty admitted Missouri's population growth over 10 years trailed many of the states that did not tax individual income, he pointed out the number of businesses increased in Missouri from 2024 to 2025 by a higher percentage than any of the states without an individual income tax. In fact, he said, Missouri added far more businesses than any of those states, some of which lost businesses for that period.

"Missouri gained 12,467 businesses from 2024 to 2025," he said. He pointed out none of the other states without an individual income tax came close to that number and Tennessee, cited by some witnesses as an example of a state that was successful because they impose no individual income tax, lost 9,511 businesses during that time frame. Florida lost the largest number of businesses, dropping 11,750 businesses from 2024 to 2025.

McCarty pointed out to the committee that the largest source of revenue in most states that have no individual income tax besides sales/use taxes were taxes on businesses. For this reason, McCarty said it was critical to determine what will be taxed to support government before eliminating the income tax and he pledged to work with the Governor and legislative leaders on a revenue replacement plan that would be acceptable to the Missouri business community, stressing that plan should be developed before the question of eliminating the individual income tax is presented to voters.

We will keep you posted of the progress of this effort.

You may watch Ray McCarty's full testimony HERE.