Governor's tax reform plan passes Senate with substantial changes

By Ray McCarty, president and CEO, Associated Industries of Missouri

Photo by Tim Bommel, Missouri House of Representatives

April 16, 2026 - Early this morning, the Missouri Senate passed a revised version of Governor Mike Kehoe's plan to eliminate individual income taxes and replace the revenue with increased and expanded sales and use taxes. The revised constitutional amendment may be found HERE. The Senate version still must be approved by a House committee and the full House of Representatives, but could happen as early as next week. Voters would have the final say in the measure.

As passed by the House on March 12, HCS HJR 173 and 174 (Rep. Bishop Davidson) had some flaws that concerned the business community. Associated Industries of Missouri is the only statewide business organization that stood up against the proposal because of the potential for shifting the tax liability from a shared responsibility between individual taxpayers and business taxpayers to liability borne by Missouri employers. The plan would have created shortfalls of revenue by forcing cuts to the individual income tax, meaning legislators would be required to increase taxes to fill the state's coffers with expanded and increased sales and use taxes on a very short timeline. The fact that the revenue shortfall would be immediate was of primary concern because there were no protections in the constitutional amendment for Missouri businesses and there was no plan indicating which services may be subject to tax, the amount of sales and use tax rate increases that would be required, no protection against shifting burden to the corporation income tax, and no protections against repealing current sales and use tax exemptions. Even more importantly, the House version did not allow pass-through entities such as sole proprietorships, partnerships, S corporations, LLC's and LLP's to enjoy the tax reduction and elimination at all - a major flaw in the legislation affecting more than 90% of Missouri businesses. The House passed its version despite regular and thorough negotiations we had with House leadership to address these shortcomings in the plan.

A Missouri Senate committee made the bill even worse by requiring a reduction in income tax rate with a flawed formula that reduced the income tax rate based on the amount of revenue collected in a full fiscal year exceeded the revenues collected in a half fiscal year. Although there were claims this was a typographical error, had that version passed the Senate, a revenue shortfall of more than $4 billion was predicted in the fiscal note (price tag for the bill). One bright spot in the Senate's earlier version is the tax cut would finally be enjoyed by all taxpayers, including pass-through entities - a direct result of our work on the bill.

Fortunately, the final Senate final version is very different. The proposal, if approved by voters, would require the General Assembly to enact legislation to reduce and eliminate the state individual income tax based on revenue growth until the tax is eliminated and, once eliminated, prevent any future individual income taxes. It should be noted that Missouri law already reduces individual income tax rates based on revenue growth and the impact of this amendment would be to allow the tax to be reduced to zero through revenue growth.

In addition, the final Senate version would require sales and use tax expansion to services and rate increases to be combined with income tax rate reductions in the same legislation. Such legislation is allowed under the current Hancock amendment without voter approval, as long as the revenue increases and decreases occur in the same fiscal year, but the bill also contains an exception from this requirement for a period of five years, meaning the revenue increases and decreases would not necessarily have to occur in the same fiscal year if enacted during this five-year period.

As in the House version, the final Senate version allows taxes to be potentially increased on motor vehicles, trailers, boats and outboard motors, and taxes to be applied to auto repair and towing services, for example, with the revenues offsetting individual income taxes instead of being used to fund road maintenance and improvements as currently required by the Missouri Constitution.

In both proposals, local governments would be required to reduce their sales and use tax rates, residential real property tax levies, personal property tax levies, or earnings taxes to result in approximately the same amount of revenue received before the sales and use tax increases. The Senate version applies a "one-time" adjustment, but as we understand the language, such adjustment would be required for each piece of legislation increasing such taxes.

We are thankful to those senators who helped improve the legislation in the Senate final version and those that worked with us to try to improve the legislation, including Senator Mike Moon and Senator Joe Nicola. Both senators voted against the legislation, along with Senator Lincoln Hough and all Senate Democrats. In the end, the legislation was the result of a deal between Senate Democrats and Senate Republican leaders and attempts to improve the legislation were rejected by senators during the early morning debate.

One troubling feature of the legislation that Associated Industries of Missouri regularly pointed out since early in the process is the potential for the state to adopt new taxes that are not sales and use taxes, but some hybrid "transaction-based" taxes. Such taxes, some of which operate in the same manner as valued-added taxes, or VATs, have been adopted in other states that have eliminated individual income taxes and AIM does not want such taxes imposed on Missouri businesses. That provision remains in the final Senate version of the legislation, meaning if voters approve the measure, we must be vigilant to prevent such legislation from passing in the future.

If passed by the House, the measure would be presented to voters. One poll conducted by the Republican polling firm Torchlight Strategies and released earlier this week showed about 37% of likely voters approved of the concept of reducing or eliminating the individual income tax, but as questions were presented regarding replacement revenues and other details, support turned to opposition, ending with more than 75% of voters saying they would oppose the measure. The ballot language, however, does not inform voters that sales and use tax rates could be increased, only that sales and use taxes would be "modified."

The measure could be taken up and passed by the Missouri House as early as next week. If approved by the House, the measure would bypass Governor Kehoe's review and would be submitted for voter approval at the November, 2026 election, unless the election date is moved to August or a special election date as determined by the governor.