Income tax versus sales tax - recent activity in Missouri

In recent years, some states have reduced income taxes and increased sales tax or proposed doing so. Recently, Missouri had Amendment 5, Income Tax Elimination and Sales Tax Changes Amendment, on their August 4, 2026 ballot. The proposal would have amended the state constitution to reduce the personal income tax per revenue growth until the tax was eliminated, but allow expansion of sales tax to reduce the income tax. Once eliminated, lawmakers would be prohibited from bringing back. Sales tax increases would via expansion of the base to include more goods and services. Reductions to the income tax would start with the top rates. See Ballotpedia and House Joint Res. Nos. 173 & 174,

The amendment was defeated with 83% of voters saying no (Missouri Independent, 8/4/26). Apparently a stated rationale for the proposed tax shift, per Governor Kehoe, was to make the state more competitive.

For several reasons, any proposal to replace an income tax with a sales tax violates principles of good tax policy. Foremost on the violation list is equity. An income tax can readily generate revenue based on ability to pay, even if the rate is flat rather than progressive. Also, income = consumption + savings. This layout of a basic formula indicates that if similar income is to be raised by an income and consumption tax, the consumption tax rate needs to be higher (since it excludes taxing savings). And if the sales tax base remains narrow, such as not being imposed on food, household utilities, personal services, entertainment, the rate has to be quite high. This exacerbates the regressivity of a consumption tax - lower income individuals must use a greater percentage of their income to pay it while higher income people use a lower percentage of their income to pay it.

Missouri taxes food but at a lower rate. While a sales tax exemption for food is applied in most states, it provides a greater savings to higher income individuals than lower income individuals because higher income people spend more on food. Accounting to data from the US Department of Agriculture, in 2024, households in the lowest income quintile spent, on average, $5,498 on food (about 33% of their pre-tax income) while households in the top income quintile spent about 3 times that amount - $16,989 (about 6.4% of their before-tax income).

Data is similar for most other spending categories - clothing, entertainment, household utilities, and personal services (such as a gardener, hair stylist, personal trainer). If Missouri was going to generate sales tax from taxing currently exempted consumption common to higher income taxpayers, such as entertainment and personal services, that would alleviate some regressivity, but likely the state would have to increase the rate too.

What about competitiveness? The proposal would not change the 4% corporate income tax, but elimination of the individual income tax would be a boon to sole proprietors and individuals who own partnerships and S corporations. This violates equity and neutrality as more businesses would aim to be passthroughs rather than corporations if possible. What about these measures to increase competitiveness?

1. If businesses do not want to locate or expand in Missouri (I'm assuming this is a problem since competitiveness was a stated purpose of the tax shift), find out why.

2. Significantly change the sales tax from being imposed at point of sale to only be assessed on individuals (remove businesses from paying sales tax or even having to collect it) by using a formula approach; Consumption = Income - savings. I and colleagues proposed this several years ago and the paper is here - https://21stcenturytaxation.blogspot.com/2017/02/more-than-one-way-to-tax-consumption.html.

This approach results in all personal consumption being subject to sales tax but not business consumption (sales tax is intended to address personal consumption). And with the formula (above), individuals below a certain income level can be exempted. This is a much better way to have sales tax exemptions for necessities of life only benefit people below some specified income level. While removing businesses from paying sales tax is a revenue hit, expanding the base for middle to high income individuals will make up for some of that. And, the state could keep sales tax on the purchase of registered vehicles for businesses as well as individuals (this is helpful to individuals financing the purchase of the vehicle because it would include the sales tax). And since these vehicles have to be registered, there is a relatively simple way to collect the sales tax.

Imagine businesses no longer having to collect sales tax, file sales tax reports or pay sales tax (except perhaps on vehicles). Wouldn't that make the state competitive? The costs and risk of error under the current and odd sales tax regime we use in the US is high.

What do you think?