Key Takeaways
- Alaska and Missouri are the latest states proposing significant shifts away from income-based taxation to transactional taxes, following a trend that Ohio has pursued at a measured pace for decades
- Alaska’s governor proposes eliminating corporate income tax by 2031 while implementing a seasonal state sales tax to address revenue volatility from oil price fluctuations
- Missouri is considering a constitutional amendment to phase out personal income tax in favor of an expanded sales tax base, though concerns remain about which services would be taxed
- Ohio’s gradual transition from income tax to sales tax represents a long-term strategy that other states are also exploring; some at an accelerated pace. In recent years, proposals in Ohio to eliminate non-business personal income tax by 2030 show Ohio’s continued transition.
- Business leaders should monitor these national trends as they signal potential changes in multi-state tax obligations and strategic planning considerations
Recent proposals in Alaska and Missouri highlight a trend that Ohio businesses should recognize; one that’s been unfolding in our own state for decades. States across the country are reassessing their reliance on income taxes and exploring transactional tax structures that promise more predictable revenue streams.
Alaska’s Corporate Tax Elimination
Alaska Governor Mike Dunleavy recently proposed eliminating the state’s corporate income tax by 2031 while implementing a temporary state sales tax to address a projected $1.5 billion deficit. The plan reflects a fundamental challenge: corporate income tax revenue fluctuates with business profits, and when oil prices drop or production declines, the state faces unpredictable budget shortfalls.
Under the proposal, Alaska would implement a seasonal sales tax; 2% from October through March and 4% during the April-September tourism season. The measure would sunset in 2034, generating an estimated $730 million annually while the state waits for anticipated oil production increases.
“Alaskans deserve a stable, rules-based fiscal system that avoids the boom-and-bust cycle that comes with a budget based on the price of oil,” Governor Dunleavy stated.
The move makes practical sense for Alaska. With no neighboring states and a robust tourism industry, the state faces limited concerns about residents crossing borders to avoid sales taxes—a challenge that smaller states in more densely populated regions must consider.
What does this mean for Ohio businesses? Sales tax nexus is very easy to get these days, with sales levels alone triggering filing requirements. While businesses still receive some federal protections against out-of-state income taxes, these do not extend to sales taxes or state taxes based on something other than net income.
Missouri’s Income Tax Phase-Out Debate
Missouri is taking a different approach with identical joint resolutions (H.J.R. 173 and H.J.R. 174) that would ask voters to approve phasing out personal income tax while broadening the sales tax base. The state’s personal income tax currently generates about 60% of Missouri’s roughly $15.2 billion in general revenue collections—a significant dependency that makes the transition complex.
The proposal intentionally leaves details open-ended, empowering legislators to determine which goods and services would be added to the tax base and how much the current 4.23% sales tax rate would increase. This flexibility has generated pushback from industries concerned about being included without explicit exemptions.
Real estate, legal services, and other professional service providers have voiced opposition. They’ve noted that only four states currently tax legal services and that expanding sales tax to real estate transactions could affect housing affordability. Missouri’s Republican governor has indicated he wouldn’t support extending sales taxes to agriculture, healthcare, and real estate, but the resolutions don’t yet specify these carveouts.
What does this mean for Ohio businesses? Services that previously were not subject to sales tax may become taxable for Ohio-based businesses in Missouri. Businesses should be careful to monitor these changes and quickly implement sales tax filings or collection to avoid falling behind on collections.
Ohio’s Decades-Long Journey
These proposals aren’t new concepts—they’re strategies Ohio has been implementing for years. Our state has gradually reduced its reliance on income tax while increasing dependence on sales tax and the Commercial Activity Tax (CAT), which functions as a gross receipts tax on business transactions.
Ohio is also considering legislation to phase out non-business personal income tax by 2030, which would eliminate state income tax on W-2 wages while maintaining it on business income (such as K-1 distributions). This distinction recognizes different revenue sources while maintaining state funding stability.
The Ohio model demonstrates both the benefits and challenges of this transition. Transactional taxes provide more predictable revenue because they’re based on economic activity rather than profits, and they more easily capture out of state businesses’ activity through much easier nexus requirements. However, they also require careful calibration to avoid disproportionately affecting lower-income residents who typically spend a higher percentage of their income on taxable goods and services.
A Global Context
This trend extends beyond U.S. borders. Most developed nations have implemented value-added tax (VAT) systems that generate significant revenue with a transactional base rather than an income base. These systems demonstrate that transaction-based taxation can work at scale, though implementation details matter considerably.
The VAT model shows that broader tax bases with lower rates can generate substantial revenue while potentially reducing compliance complexity. However, the transition requires thoughtful policy decisions about exemptions, rate structures, and timing.
What This Means for Ohio Businesses
For businesses operating in multiple states, these proposals signal potential changes in tax obligations and planning strategies. Companies with multi-state operations should consider several factors:
States love less revenue volatility: Transactional taxes may provide more stable state revenues and avoid the current restrictions on income taxes. States have continued to shift their focus to these funding mechanisms, with expansion of the sales tax base being a key tool. Businesses need to keep on top of these changes and avoid “set it and forget it” mentality. A regular review of a company’s sales tax posture is highly recommended. Rea’s state and local tax advisors can help identify where your business has new obligations and ensure you’re properly registered and compliant before issues arise.
Compliance complexity: Each state’s approach to transactional taxation varies significantly. Missouri’s proposal to tax professional services, if enacted, would create new compliance obligations for service providers. Alaska’s seasonal tax structure adds another layer of complexity for businesses operating year-round. Taxes only apply for a portion of the year, making timing of the “sale” very important (is it the invoice date or the fulfillment date that matters?). States’ portals and filing systems make nationwide compliance even more difficult.
Strategic planning: As states continue this trend, businesses need to evaluate how changing tax structures affect location decisions, pricing strategies, and operational planning. The shift from income-based to transaction-based taxation may influence where and how companies structure their operations. Existing issues, such as location of fulfillment services or FBA Amazon services, already complicate the required compliance landscape for companies.
Policy uncertainty: Missouri’s open-ended proposal illustrates the challenge of transition periods. Businesses should monitor these developments closely, as the details of implementation may significantly affect operational and financial planning.
Looking Ahead
The Alaska and Missouri proposals are part of a broader national conversation about sustainable state revenue systems. Ohio’s experience provides valuable insights into both the opportunities and challenges of this transition, and we can learn from other states’ successes or failures along the way.
For Ohio businesses, particularly those with multi-state operations, staying informed about these national trends is essential. As more states explore similar transitions, the landscape of state taxation continues to evolve. Understanding these shifts helps businesses anticipate changes and adapt their strategies accordingly.
The conversation about income versus transactional taxation isn’t ending; it’s expanding. Ohio businesses that understand this broader context can better navigate the changes ahead. Rea provides solutions for our clients to navigate the shifting landscape, file sales tax through a single software nationally, and stay ahead of tax changes for their products and services.
About the Author
Joe Popp is a Principal at Rea specializing in state and local taxation. With expertise in tax law and multi-state compliance, Joe helps businesses navigate complex sales tax obligations across all 50 states. If your business operates in multiple states and you’re concerned about keeping up with changing sales tax requirements, Rea offers comprehensive compliance solutions including nexus studies, registration services, and centralized filing through a single software platform. Contact Joe at joseph.popp@reaadvisory.com or (614) 923-6577 to discuss how we can help protect your business from compliance gaps and penalties.
