Missouri's tax code isn't built for today's economy and needs to be revamped by eliminating the individual income tax and broadening the state's sales tax to capture more internet-based commerce, according to Gov. Mike Kehoe.

At first glance such a plan would seem business friendly. Companies wanting their employees in or close to an office on a regular basis might have an easier time hiring workers if they locate in states with low or no income taxes, according to Janelle Fritts, policy analyst at the Washington-based Tax Foundation, a research think tank.

But the piece of the plan that would make up for the lost tax revenue by broadening Missouri's sales tax could also harm some business owners.

Large internet-based companies already collect and remit state taxes, so the impact of a Missouri sales tax would likely be felt more by comparatively smaller Missouri businesses, which would be burdened with additional compliance costs and feel pressure to pass along the added costs to consumers, Fritts said in an interview.

Local businesses for the first time would have to pay tax on electronic services such as customer relationship management software, and would likely pass along that sales tax to customers.  Missouri consumers, meanwhile, could also see an increase in on-line subscription costs, which could stifle instead of promote economic activity.

The state’s Republican governor made the case for his tax plan in a Jan. 13 State of the State address.

"Missouri’s tax code was built for the past 100 years," Kehoe said during the address. "Today, much of our commerce happens through monthly subscriptions and digital services like online advertising, e-books, and A.I. platforms that fall outside our current sales tax base. Their billionaire owners don’t pay.”

Changing the state's tax code could fuel economic activity and make Missouri more competitive, Kehoe said.

Income tax reductions or outright elimination can help pass-through entities such as Missouri-based sole proprietorships, because those businesses typically report income via company owners through their individual income on state tax returns, Fritts said. Lower rates means lower taxes on owners, she said.

If Kehoe's envisioned tax does extend to electronic services such as online advertising, a Missouri-based company would have to pay tax on ads seen not only in Missouri but all states, such as in neighboring Kansas, said Tax Foundation senior fellow Jared Walczak.

Meantime, a company in Kansas would pay no tax for advertisements shown in Missouri because like most state sales taxes, the Kansas sales tax is destination-based and looks to where goods or services are consumed or where benefits are received, Walczak said.

Eliminating a state income tax should not be the ultimate goal; instead, states should think about constructing a tax code that promotes economic growth, Fritts said.

Though the state of Georgia is also considering eliminating its income tax, a more common trend in 2026 among the states is to reduce their income tax rate — or move to a flat tax. Nebraska, North Carolina, and Pennsylvania, for instance, reduced corporate income tax rates on Jan. 1.

Many states also rely heavily on their income tax revenue to fund their governments: individual income taxes accounted for 33% of state tax collections during fiscal 2023, according to the Tax Foundation. Missouri's individual income tax collections accounted for 30.6% of its total revenues in fiscal 2022, the data showed.

"That is a lot to ask to replace," Fritts said.