This blog was last updated on February 10, 2026

Should states eliminate their corporate and personal income taxes and replace them with a broad-based sales tax applied at a modest rate? The White House Council of Economic Advisers says absolutely yes. In a recently published paper, the Council makes the case that sales tax is a far more stable source of revenue and that states embarking on this transformation would grow their GDP, encourage innovation and entrepreneurship, increase wages, and attract high income individuals. However, not everyone agrees and critiques of these conclusions have been swift and scathing.  

This report arrives amid growing momentum for state-level tax reform. While Kentucky and Louisiana have already enacted changes consistent with these suggestions, similar proposals are advancing in Missouri, Georgia, and Alaska during this legislative session, suggesting increased interest in greater reliance on sales taxes. 

In this article we will talk about the assertions made by the Council, the critiques thereto, and how these changes are (and are not) playing out in real time.  

The Economic Case for Replacing State Income Taxes 

Legislators and policymakers have a variety of potential taxation methodologies to choose from, including income tax (personal and corporate), property tax, sales tax, excise tax, and other fees and levies. Today, states vary widely on their taxation approach, with 9 states levying no personal income tax at all and 5 states with no state-level sales tax. Within the remaining states that have both sales and income tax, the proportion of state revenue derived from each varies significantly.  

The paper asserts that not all choices are equal, that some taxes are more inefficient at generating revenue and impose greater costs on society. Their assertion is that sales taxes are far more efficient and less burdensome than income taxes, and that states would do well to eliminate income taxes entirely. 

The authors consider the following to be the most appalling “economic costs” of income tax.  

1. Migration and Brain Drain: Workers and businesses can readily avoid high income taxes by re-locating to lower tax jurisdictions, with high income individuals having the most geographic flexibility. Increasing income taxes can lead to population losses so severe that they lead to no net revenue gain.
2. Stifling Innovation and Entrepreneurship: Innovators will not only choose to migrate to lower income tax states but those that remain will be less incentivized to innovate in response to lower after-tax returns. High corporate income taxes discourage startup formation.
3. Displacing Business Activity: High income taxes encourage businesses to move operations into lower tax jurisdictions, especially for businesses that already have locations in multiple states and can readily shift between them. 

The Tradeoffs: Replacing Income Taxes with Sales Taxes 

The aggregate effect, the authors suggest, is income tax increases work to contract the economy. They suggest that a tax increase of 1% of GDP will shrink real GDP by 2% to 3%. Conversely, a one percentage point cut in income tax can ultimately raise real GDP by 1.8%.  

The paper further notes that beyond inefficiency, income tax revenue fluctuates sharply with economic conditions. States that are heavily reliant on income taxes can experience a revenue decline of 20% to 30% during hard economic times while states more reliant on sales and property tax may experience a decline of 5% to 15% under similar circumstances. Since most US states are legally required to pass a balanced budget, these fluctuations present a material challenge to long-term fiscal planning. 

Based on this data, the authors propose eliminating income taxes and adopting a broad-based sales tax covering all products and services except housing, groceries, business inputs, or any item taxed under another system (e.g. gasoline tax, alcohol tax, excise tax). Most importantly, the Council contends that if states only increase spending to account for inflation, the corresponding average sales tax rate across the country needs to be no higher than 6.2%. 

However, these optimistic projections have drawn immediate pushback from tax policy experts. 

Criticism of Eliminating State Income Taxes 

The Tax Foundation, which was frequently cited in the report, has already posted an article suggesting that the conclusions reached by the Council do not withstand scrutiny. While conceding that consumption taxes are indeed more efficient than income taxes, they believe the average rate needed to replace all income tax revenue is closer to 17.51% rather than 6.2%. Their main point of contention is that the Council envisions a sales tax base that includes elements of the economy that are either impossible or impractical to tax, including: 

1. All healthcare costs, excluding insurance premiums but including those covered by private insurance, Medicare, and Medicaid 
2. Financial services, including the value of banking services even though they are generally funded by depositor fees, 
3. Services provided by nonprofits, including scholarships and subsidies. 
4. Transactions not legally taxable, including internet access and purchases from the USPS.

For a household spending $50,000 a year on taxable goods and services, the difference between a 6.2% sales tax rate ($3,100 annually) and a 17.51% rate ($8,755 annually) represents an added tax burden of $5,655. Whether that would be fully offset by dropping their state income tax obligation is far from clear.  

The report also assumes perfect compliance – meaning every taxpayer pays 100% of their obligation. Unfortunately, every tax professional knows there will always be a “gap” between taxes due and paid. For example, the IRS estimated that the net tax gap for Tax Year 2022 was $606B, over 13% of total true tax liability. 

In an article published by Accounting Today, the author draws attention to the fact that the Council completely disregards the regressive nature of sales taxes. Sales taxes are regressive because they impose a higher financial burden on people who spend a greater percentage of their income and a lesser burden on those that save. Broadening the sales tax base would exacerbate this regressive effect. They also note that there was no mention of tariffs, which already represent an added regressive burden on consumers. 

And the report is only a few weeks old, additional critique is sure to follow in the coming weeks and months. 

Real-World State Tax Reforms 

The pandemic taught states a valuable lesson about sales tax stability. As businesses shuttered, states predicted massive revenue shortfalls. What they didn’t count on was an increase in consumer spending on material goods, all rendered fully taxable by the 2018 Supreme Court decision in South Dakota v. Wayfair.  Sales tax, at least in part, saved the day.   

Since then, several states have adopted legislation that reduces their income taxes while simultaneously expanding their sales tax, the most notable examples being Kentucky and Louisiana. 

In 2022, KY HB-8 was passed over Democratic Governor Andy Beshear’s veto by the Republican supermajority. Under the law, the personal income tax rate was cut from 5% to 4.5% (currently 3.5% with the possibility of dropping further assuming certain financial triggers are met) while expanding the sales tax base to include close to 40 new service categories. 

More recently, in 2024-2025 Louisiana passed a series of bills reducing the personal income tax rate to a flat 3%, reducing the corporate income tax rate to a flat 5.5%, and repealing the corporate franchise tax entirely. These changes were funded, at least in part, by increasing the standard sales tax rate to 5% and expanding the sales tax base to include a number of additional goods and services. 

Although the 2026 legislative session is just underway, there is a clear push for significant tax reform in several Republican-led states. Missouri Governor Mike Kehoe announced, in his state of the state address, a proposal to fully eliminate the individual income tax over time. While he hasn’t specified which new services would become subject to sales tax, expanding the base is clearly on his mind as he has said he would never tax agriculture, healthcare or real estate. Likewise, Georgia has convened a Senate Special Committee on eliminating the income tax. The proposal remains vague about the impact on sales tax. Finally, Alaska Governor Mike Dunleavy is proposing a fiscal plan that includes eliminating the corporate income tax and adopting a brand new, seasonal, statewide sales tax. 

Is Eliminating State Income Tax a Sustainable Long-Term Strategy? 

Eliminating state income taxes reflects a significant gamble on consumption-based taxation. Proponents argue sales taxes are more stable and pro-growth; critics warn of inadequate revenue and regressive impacts. States pursuing this path face a strategic constraint. Once nearly everything is taxed, further expanding the base becomes impossible, leaving politically unpopular rate increases as the only tool during budget shortfalls.  

As Kentucky, Louisiana, and others forge ahead, their experiences will provide crucial evidence about whether income tax elimination delivers promised benefits or creates new fiscal challenges. For now, the transformation of state taxation remains a live experiment.