How states came to depend on income tax

By Peter S. Pynadath, Missouri News Network
Removing individual income tax and replacing it with a broader sales tax base has been a top priority for the Republican Party this legislative session.
If this proposed tax reform is approved by Missouri voters, Missouri could join nine other states with no income tax, becoming the first since Alaska in 1980 to fully repeal its individual income tax.
Missouri is not alone: states such as Mississippi, Kentucky and Oklahoma are also attempting to eliminate personal income taxes.
The history of Missouri’s income tax structure, which generated 63% of the state’s estimated budget in 2025, follows an evolution of differing approaches to deriving revenue for state expenditures.

Early state tax efforts
According to the Hoover Institution, the concept of taxing income, or a structure with a similar effect, has been around since the colonial era. As the seeds were being planted for the tree that would later become America, the colonists needed a way to derive revenue to fund these developments. A rudimentary form of taxation was established, and throughout different eras of the nation’s history, it evolved into what it is today.
A faculty tax, which in some cases mirrored the modern income tax, and poll taxes became a model for the colonies’ tax systems.
Every man, 16 years and older, was required to pay an annual poll tax that was the same rate for all eligible taxpayers. The faculty tax was based on the assessed value of an individual’s lands, goods, stock and other assets, and it aimed to tax colonists’ capacity to generate income and how much they could produce.
At the turn of the 18th century, colonists, under British rule, took any chance they could to avoid paying taxes. Colonists tried to avoid taxes by hiding their real assets, undervaluing farmland or outright refusing to pay.
After the American Revolution and as the new nation emerged, states needed a way to fund their government outside of the federal government. In 1817, Pennsylvania levied a tax on bank dividends, which became a major source of revenue. This tax generated roughly $100,000 annually in the 1840s and over $200,000 in the 1850s.
In 1840, Pennsylvania imposed a 1% tax on salaries, as the state had accumulated a large amount of debt. This did not generate enough revenue, so in 1841 an additional law raised the rate to 2% with two key provisions. The first was a $200 exemption, and the second stipulated the state treasurer would withhold the tax from the salaries of state employees.
During the 1830s, to fuel westward expansion, states made large infrastructural improvements, including roads, canals, bridges and railroads.
To pay for these expenditures, states relied on a federal revenue-sharing system, where Congress distributed a portion of the federal revenue surplus to each state.
However, in 1836 the federal government did not have a revenue surplus, causing states to experiment with different ways to raise funds. The discussion was mostly centered around taxation.
According to the Accounting Historians Journal, throughout the 1840s, several southern states experimented with taxes related to income.
Many legislators from these southern states, who were mostly plantation owners, opposed a property tax, as they argued it would negatively impact farmers and landowners. Instead, their attention turned toward taxing a growing middle class made up of a variety of professions.
In 1843, Virginia levied three separate taxes that acted as the state’s first tax structure related to income. A 1% fee was placed on salaries over $400, a 1% tax on professional fees over $400 and a 2.5% tax on interest from securities valued over $100.
Only a few were subject to tax, as the law exempted ministers, laborers, craftsmen and merchants.
Alabama, Florida, North Carolina and others adopted a similar tax structure due to similar economic events.
In 1845, Florida levied a 0.2% tax on income on certain professions, then expanded it to all business incomes five years later. However, outrage among residents was so severe that Florida abolished this tax in 1855 and never implemented an income tax structure again.
Many of these states were not successful in collecting significant revenue. For example, Virginia scrapped together $16,000 from income tax in 1844. Furthermore, most of that sum was due to a broad tax on interest. According to the Journal, by 1858, income tax generated $104,000 of the state’s total revenue.
The Confederacy implemented a similar tax, so individuals in the South paid taxes at both levels. Following the war, the Journal noted several states began to abolish these tax structures, such as South Carolina, Georgia, Texas and Alabama.

Modern state income tax
The first income tax structure at the state level, as it’s understood today, was adopted by Wisconsin in 1911.
This coincided with an era in U.S. fiscal history known as the Progressive Era from 1880 to 1920. Ajay Mehrotra, a law and history professor who researches U.S. tax and fiscal history, said a driving force behind this reform was issues with the state’s current tax structure, which heavily relied on its property tax.
“Wisconsin, which is kind of known as the cradle of progressivism, was doing things like unemployment insurance and other kinds of early welfare benefits,” Mehrotra said.
Mehrotra said Wisconsin’s property tax structure was supposed to tax intangible property as well, but this was difficult to administer and enforce.
In states with a similar structure, such as Ohio, taxpayers’ furniture and belongings were subject to tax and assessed each year. However, Mehrotra said there were obvious lapses. For example, according to the property tax rolls, nobody in Ohio owned a watch at that time.
“So on the one hand, people were not reporting, but on the other hand, the state government didn’t have the capacity to actually assess and collect the tax,” Mehrotra said.
According to the Wisconsin Policy Forum, the state’s new income tax structure was able to generate revenue from intangibles such as stocks, bonds and salaries, which were not taxed previously.
Wisconsin’s original tax had 13 rates ranging from 1% to 6%. The top rate was applied to income over $12,000 at the time, and did not change until 1932, when all rates over 1.5% were increased.
According to the Tax Foundation, Massachusetts became the first state to have a flat income tax rate, which went into effect in 1917.
According to the Journal of Political Economy, Oklahoma’s first income tax structure in 1915 taxed the net income of residents and nonresidents.
In 1912, Mississippi was one of the first states in the South to adopt this modern form of income tax. At the time, much of the state’s revenue came from property taxes, which placed a large burden on small landowners and farmers.
The Nonpartisan League in North Dakota made a similar argument, and the party dominated by farmers and property owners was able to implement a similar income tax in 1919. States such as Massachusetts, Virginia and New York implemented a modern income tax structure between 1912 and 1919.
Missouri adopted a flat rate of 0.5% on taxable income, known as the “original law,” in 1917. The state also created the State Tax Commission, which was made up of three officers, one being the state budget officer. The group was tasked with creating the Missouri state budget.
“Wisconsin was a leader in many ways during the Progressive Era,” Mehrotra said. “It really was a pioneer, not just in tax policy but also in social spending as well; it’s not surprising that other states look to Wisconsin.”
Mehrotra said Wisconsin was successful with its new income tax structure in large part because it established the needed administrative capacity to ensure the taxes are properly assessed and collected. Organizations outside of the state government, such as a bank, were required to report when people had certain kinds of income, such as interest.
“Third-party reporting is a really crucial aspect to an effectively administered income tax to this day,” Mehrotra said. “There’s a reason why 98% of W-2 wage income is accurately collected.”
According to the Cato Institute, the Great Depression caused tax revolts throughout the 1930s, as many could not pay property taxes.
For cities with a population over 50,000, the rate of property tax delinquency rose from 10% in 1930 to 26% three years later. In cities like Chicago, about half of all homeowners refused to pay their property taxes by 1932.
In response, between 1930 and 1939, 17 states adopted an income tax at the state level to address issues the Great Depression brought.
In 1949, a decade before it became a state, Alaska had its own territory income tax. For residents and nonresidents alike, a 10% tax on an individual’s federal income tax liability was implemented. Between 1949 and 1961, this rate rose to 16% as Alaska became a state in 1959.
However, in 1980, the state’s personal income tax was repealed because of an oil boom that produces much of the state’s revenue to this day.
According to the Cato Institute, from 1960 to 1975, state and local spending rose, and states needed more revenue to fund these expenditures.
Throughout the late 1960s, Midwest states, a few on the coast and Nebraska adopted a state-level income tax. After Ohio and Pennsylvania joined their neighbors in 1971, a majority of states at this point had a state-level income tax and relied on it heavily for revenue.

Efforts to eliminate state income tax
In 2016, at the very end of the year’s legislative session, Tennessee lawmakers enacted a six-year plan to eliminate a tax on interest and dividend income. The Hall Tax, implemented in 1929, was a 6% tax on Tennesseans’ interest and dividend income from bonds or stocks. This tax was fully repealed in 2021.
In 2022, Kentucky began its path towards eliminating individual income tax. House Bill 8 aimed to gradually phase out Kentucky’s individual income tax. Reductions to the tax rate can happen once the state meets certain savings and revenue goals. Effective this year, Kentucky’s individual income tax rate was reduced from 4% to 3.5%, and the state hopes to fully eliminate the tax by 2032, granted the reduction triggers are met.
Mehrotra said that the story of state income tax is one of equity. A majority of states with no income tax have a general or select sales tax of some kind.
“A sales tax is regressive; it hits the poor more than the rich, so moving from an income tax to a sales tax is a move towards regressivity,” Mehrotra said.
“One of the things that progressives in Wisconsin wanted to do was address growing inequality, and having an income tax was one way to do that,” Mehrota said.