The US Council of Economic Advisers (CEA) published a paper on the economic impacts and practicalities of states phasing out personal income taxes, analysing how alternative revenue and spending approaches could affect GDP, wages, business formation and the migration of high-income taxpayers. The analysis models two reform scenarios on a state-by-state basis: full revenue replacement via a broadened sales tax base that keeps the baseline forecast for total tax revenue unchanged, and a combined approach that broadens the sales tax base while limiting spending growth to maintain government services at current levels. Drawing on economics literature that it says finds income taxes are more economically damaging than sales or property taxes and are associated with outmigration, reduced innovation and revenue volatility, CEA estimates that, for the average state, phasing out the income tax would raise the level of GDP by 1 to 1.6 percent, increase new startups by 16 to 19 percent, and lift the average wage by USD 4,000, alongside a significant influx of high-income taxpayers. It also estimates the average state sales tax rate required would be under 8 percent under full revenue replacement, or 6.2 percent under the scenario with spending growth limits.
Council of Economic Advisers 2026-01-28
US Council of Economic Advisers models state income tax elimination lifting GDP 1–1.6% with average sales tax rates under 8%
The US Council of Economic Advisers published a paper analyzing the economic impacts of states phasing out personal income taxes, suggesting such reforms could increase GDP by 1 to 1.6 percent, boost new startups by 16 to 19 percent, and raise average wages by USD 4,000. The study models two scenarios: full revenue replacement with a broadened sales tax base and a combined approach with spending growth limits, estimating necessary average state sales tax rates of under 8 percent and 6.2 percent, respectively.