Governor Kehoe's proposal shifting state government funding from income to sales/use taxes heard in Senate

April 2, 2026 - Associated Industries of Missouri (AIM) president and CEO Ray McCarty testified against HCS HJR 173 & 174, sponsored by Rep. Bishop Davidson (R), and promoted by Governor Mike Kehoe. The bill would allow voters to decide if they want to replace the current individual income tax with expanded and increased sales/use taxes and potentially other gross receipts taxes.

AIM's position opposing the bill was developed after weeks of negotiations directly with the bill sponsor and House leadership that ultimately did not address the business community's concerns, or implement protections against shifting more of the responsibility for funding state government to Missouri businesses. The House passed the bill with only minor changes with regard to issues we raised and the bill is now in the Senate. The hearing was held yesterday and we expect the bill to advance from the committee next week.

The resolution, as currently drafted, would not allow the income tax reduction and elimination to be enjoyed by businesses reporting their business income on their individual income tax returns. The language limits the tax cut and elimination to "the state tax imposed directly on the income of natural persons" - a term used in law to distinguish between human beings and legally created "persons" such as pass-through entities. Businesses organized as pass-through entities, such as S Corporations, partnerships, sole proprietorships, LLCs, LLPs, etc., are specifically excluded from the proposal. This includes farmers and other small and mid-sized businesses that are organized in this manner.

"We have been negotiating with the sponsor of the proposal to include all business income in the tax reduction and elimination and have received assurances from the sponsor this change will be made, but it has not been removed in the draft currently before the committee," said McCarty. "Allowing more than 90% of businesses to enjoy some tax relief helps the proposal become more attractive for businesses, but that is not our only concern with the proposal."

Rep. Davidson presented the bill to the committee and stated several times that the proposal only uses growth in state revenue to eliminate the income tax over time. Senator Patty Lewis (D) asked Rep. Davidson to read the lines in the proposal that authorize the expansion of sales and use taxes and any similar transaction based taxes to any goods and services for the purpose of eliminating the individual income tax and he read that passage out loud for the committee. When questioned by Senator David Gregory (R) about whether the proposal would tax legal services, Rep. Davidson said the proposal does not increase any taxes and that would be decided in future legislation if voters approve the constitutional amendment.

The lead witness testifying in favor of the proposal was Aaron Hedlund, a Trump appointee to the White House Council of Economic Advisors. According to his LinkedIn profile, Hedlund is on leave from his role as a Chief Economist for the Show-Me Institute, a think tank whose president and co-founder is Missouri billionaire Rex Sinquefield.

Hedlund said Missouri was "getting whooped" by states that had no income tax. He pointed to slow growth in population as an indicator that Missouri's current tax on income was stifling growth. He pointed to states with higher population growth and suggested the lack of income tax burden was at least one reason for that growth.

McCarty said Missouri was not, in fact, "getting whooped" and he presented statistics to the committee showing Missouri attracted more businesses than all but one of the no tax states, had the lowest cost of living of any of those states, had the lowest percentage of taxes paid by businesses of any of the no tax states and the lowest corporation income tax rate of those no tax states that had a corporation income tax. He also pointed out the fact that between 2024 and 2025, several of the states without an individual income tax actually lost businesses between 2024 and 2025, including Tennessee (lost 9,660 businesses) and Florida (lost 18,792 businesses).

AIM was the only statewide business advocacy organization to oppose the proposal; however, none of the other statewide business advocacy groups supported the plan either.

AIM will continue to work against the proposal until our concerns have been addressed and will keep you posted of our progress.