Governor Kehoe calls for tax and spending reform in 2026 State of the State Address

By Ray McCarty

January 13, 2026 - Governor Mike Kehoe delivered his 2026 State of the State Address this afternoon, highlighting his legislative priorities for the 2026 Legislative Session and budget recommendations for the FY 2027 state budget.

Governor Kehoe called for "modernizing Missouri's tax code." In his remarks, he said, "Missouri brings real strengths to the table when recruiting jobs and investment. But when we’re competing against states like Tennessee and Texas, states with no individual income tax, too often the conversation ends before it truly begins." He pointed to stagnant population in Missouri and said, "Competitiveness starts with our tax code. Missouri's tax structure must evolve."

Governor Kehoe said the first step is gaining approval from Missourians at the ballot box this year for "a phased elimination of the individual income tax, with a full repeal within the next five years." He said Speaker of the House Jon Patterson and Senator Curtis Trent would carry the legislation that would place the question on the ballot. If voters approve the ballot question, he said, "I look forward to working with the General Assembly next session to carry out the will of the people and put this plan into action."

He said, "The current tax system was designed for a checkbook economy," and said his plan pairs tax relief with closing "loopholes." He specifically mentioned taxing modern services like monthly subscriptions and digital services, online advertising, e-books, and AI platforms that are excluded from the current sales and use tax base.

Acknowledging that an increase in sales tax would produce additional revenues for local governments, he said the increased revenue would need to be offset by reducing local taxes, like property taxes, which he said was a high priority for "Missourians and many of us in this room."

He said the plan involved using revenue triggers to reduce the income tax rate, presumably similar to the current revenue trigger/income tax reduction system passed after an intense advocacy effort by Associated Industries of Missouri that has already reduced the income tax burden on businesses by about 40%.

Finally, he declared, "I will never support extending sales taxes on agriculture, healthcare, or real estate."

He also made a commitment to balance the $53.8 billion budget that he said was facing a $2 billion imbalance by cutting $600 million in spending and increasing state government efficiency. He issued an executive order launching a new initiative called Missouri Government Responsibility, Efficiency, Accountability and Transformation - Missouri GREAT. "In consultation with the Governor’s Office and participating business leaders, coordinators within each state agency will identify and eliminate inefficiencies in state government," he said. He said artificial intelligence (AI) could also be used to drive government efficiency. In budget documents, his administration noted more than 3,400 new budgetary items and nearly $13 billion in new general revenue spending had been added to the state budget since FY 2022.

"If we are serious about building a foundation for growth, to compete rather than be complacent, then we must begin the work now to phase-out and eliminate Missouri's individual income tax," said Governor Kehoe. "We can do both. We can maintain a balanced budget that supports essential services and pursue a bold tax policy that improves Missouri’s competitiveness."

Associated Industries of Missouri has been a longstanding leader in tax policy. We look forward to learning more about Governor Kehoe's tax cut plan and his plan to replace the current $8 billion that is generated by the individual income tax with expanded sales and use taxes on services and other transactions that are not taxed today. While more than 90% of Missouri businesses would benefit from reducing or eliminating individual income taxes, service businesses and those not currently collecting and remitting sales and use taxes on some transactions could face an increased burden. That burden would be administrative as they are faced with the burden of collecting and remitting the taxes and financial if taxing services and other transactions reduces the amount consumers spend for those services. Nearly all disputes between taxpayers and the Missouri Department of Revenue involve sales and use tax collection and administration.

Another note as we consider Texas and Tennessee, both of which were cited by Governor Kehoe as examples of states with no individual income taxes.

Texas generates revenue from a tax on profits, called a margins tax, instead of a state income tax. This tax is paid by all types of businesses doing business in Texas, including corporations, limited liability companies (LLC's), and partnerships.

Tennessee generates more than 60% of their revenue from sales and use taxes, but the next largest source of revenue are two taxes on businesses: a franchise tax and a corporate tax of 6.25% on business income. AIM has successfully worked with the Missouri legislature to eliminate the Missouri franchise tax and reduced the Missouri corporation income tax to 4%, one of the lowest rates in the United States.