Missouri Gov. Mike Kehoe used his State of the State speech on Tuesday to call for a phaseout of the state income tax — a move he said voters would have to approve.
The Republican governor's budget, which spends less money than in the recent past, includes more funds to remove debris from last year's tornado in St. Louis, which is an outlay that budget leaders could continue over the next few years.
Kehoe's income tax plan was the centerpiece of his speech to a joint session of the General Assembly. The proposal would phase out the tax over a five-year period and make up for the lost revenue by allowing taxes on certain services.
Kehoe noted in his speech that sales taxes are not placed on monthly subscriptions and digital services like online advertising, e-books and AI platforms. A statewide vote is necessary since Missourians banned sales taxes on services in 2016.
"When these types of modern services are taxed, it will create new revenue for local governments," Kehoe said. "These increases will need to be offset by reducing local taxes, like property taxes, a high priority for Missourians and many of us in this room."
Kehoe said the plan "includes safeguards to ensure fiscal responsibility and protect against economic downturns, by requiring triggered reductions to the income tax rate."
"Eliminating the income tax is not about runaway sales taxes," Kehoe said. "And I will never support extending sales taxes on agriculture, health care or real estate. Period. This is the people's money, and they can spend it better than politicians. This plan is about aligning our tax code with today's economy and not yesterday's. Missouri's tax code was built for the past 100 years. Our economy demands one for the next 100 years."
Democrats pan tax plan
Reaction to Kehoe's income tax plan diverged on party lines.
House Budget Chairman Dirk Deaton, R-Seneca, said it was "high time" the state get rid of the income tax. He said the way Kehoe is approaching replacing the lost revenue makes sense.
"We need to broaden the base," Deaton said. "And there's too many exclusions and exemptions, and we would have to make sales tax applicable, frankly, to some things that it's not currently. But again, keep in mind you wouldn't be paying state income tax in this instance."
Democrats such as Sen. Tracy McCreery, D-St. Louis County, have questioned whether eliminating the income tax is possible without wrecking future budgets or pushing sales taxes up to recoup the lost revenue.
"We need all of our leaders to be focused on affordability," McCreery said before the governor's address. "That's where my attention is, and I hope the entire Senate joins me in working on ways to lower costs for Missouri families, businesses and communities. With that in mind when I hear the governor's State of the State address, and when we review his budget in the coming weeks, here is what I do not want to see. I don't want to see any new taxes, any expansion of taxes, any increase in taxes, and any hidden tax disguised as fees."
House Minority Leader Ashley Aune, D-Kansas City, said Kehoe has proposed "one of the largest and most devastating tax increases in state history."
"If you enjoy paying substantially higher taxes on just about everything you buy, you'll love tax hike Mike's plan," Aune said.
Senate President Pro Tem Cindy O'Laughlin, R-Shelbina, praised Kehoe putting the plan up for a vote, adding, "anytime people have a voice in something, I think that's appropriate."
She said it remains to be seen if just taxing certain services – and leaving out others – will be enough to have a workable budget.
"I think he has plenty of people that he's working with to get those answers," O'Laughlin said. "He is a businessman. And if there's one thing businesspeople know, it's that you don't commit to something until you have really researched it thoroughly."
Kehoe said: "As someone who raises horses and cattle, believe me, if you keep putting hay and grain in front of them, they'll eat. So will government."
"The folks who say that just want to spend more of your money," he said. "I will never apologize for putting money back in the pockets of hardworking Missourians."
A smaller budget
Kehoe is proposing about a 4% cut in general revenue spending, marking an end to a string of budgets during the COVID-19 pandemic that substantially boosted the state budget with federal dollars.
"The days of excusing budgetary decisions with fund balances and so-called surpluses are over," Kehoe said.
He pointed to a report from state Auditor Scott Fitzpatrick showing that Missouri's large budgetary surplus that grew after the pandemic is rapidly depreciating.
"Our recommendation proves that state government can live within its means, and our economy can grow and deliver results for taxpayers all at the same time," Kehoe said. "It cuts more than $600 million from the core, starting to correct a future spending imbalance of potentially over $2 billion."
Rep. Betsy Fogle, D-Springfield, said the core cut that Kehoe was proposing coincidentally lines up with the revenue lost due to the elimination of the capital gains tax.
"I think those numbers are kind of interesting, that we're cutting about the same amount that we reduced in capital gains last year," Fogle said.
Fogle said House Democrats' role this year with the budget is to protect the funding for vital services.
"We would anticipate significantly fewer one-time expenditures happening, significantly fewer ongoing investments, and really getting to the core of what state government should be doing," Fogle said.
Still, the budget does continue a pay plan that gives a 1% increase for state employees per two years of service. And state Budget Director Dan Haug said the plan has a total of $186 million that can be used for debris removal from the St. Louis tornado.
That figure includes $100 million that lawmakers approved in a 2025 special session for tornado relief – as well as an additional $86 million. Haug said the federal government is slated to pick up about 75% of the cost.
Kehoe's budget also seeks to expand state funding of a program that can help pay for private K-12 tuition from $50 million to $60 million. State Treasurer Vivek Malek had asked for $100 million in this year's budget.
"Students across our state have brighter futures because their families were given educational choice," Kehoe said. "They remind us that when we put students first, opportunity follows."
Fogle said that she was thankful to see the $60 million request instead of $100 million, but that it will continue to be something Democrats push back on.
"I think if we are going to go down this path of privatizing education, which the governor has made clear his intent to do so, we cannot do it at the expense of our public education systems," Fogle said.
For the second year in a row, Kehoe is not recommending the legislature fully fund the state's K-12 public education funding formula.
According to Fogle, the proposed budget for the foundation formula falls around $190 million short of what it should be.
In addition, Kehoe backed an open enrollment plan that would allow students to attend a public school district other than the one in which they reside. Similar plans faltered in the past couple of legislative sessions due to bipartisan opposition.
"It's about fairness. It's about access," Kehoe said. "And it's about making sure no child's future is limited by their address."
Kehoe acknowledges bruising 2025 session
Near the end of his speech, Kehoe alluded to how Republicans forcibly ended Democratic filibusters on abortion restrictions, congressional redistricting and a measure that makes it harder to approve constitutional amendments.
"Over the last year, we came together for one regular session, two special sessions and everything in between," Kehoe said. "And throughout it all, there have been times when tensions ran high, and we found it easier to see each other's differences before our similarities."
Senate Democrats in particular have said they may retaliate by throwing up procedural roadblocks to make advancing legislation much more difficult. That could imperil much of Kehoe's nonbudgetary agenda, such as the income tax elimination plan.
Kehoe said, "Let us remember that beyond party labels, beyond floor speeches, and beyond the noise, we are here for a higher purpose."
"It is our job to serve – not as Republicans or Democrats, not as urban or rural – but as Missourians, putting our values first, working together when it matters most," he said.
This story has been updated with reaction to the governor's speech from lawmakers.
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