The Council of Economic Advisors (CEA) is an agency within the Executive Office of the President that provides objective economic analysis and advice on both domestic and international policy. The CEA is considered one of the most prestigious appointments an economist can receive and is often viewed as the “pinnacle “ career. Unlike other government agencies that are often led by political operatives, the CEA is almost exclusively staffed by toptier academic economists including several Nobel Prize winners. This is why reports issued by the CEA are taken seriously by both politicians and economists.
The January 2026 report by the CEA is labeled “The Economic Impact of State Income Tax Elimination” and their Executive Summary states:
* Income taxes are more economically damaging than sales or property taxes;
* The harmful economic effects of state income taxes include outmigration, brain drain, stifled innovation and entrepreneurship, and reduced GDP;
* The harmful fiscal effects of state income taxes include revenue volatility with “feast and famine “ cycles, with states often gaining little or no new revenue from income tax hikes because of the negative economic effects they unleash. Key findings from CEA’s analysis of state income tax phase-out include:
* A 1 to 1.6 percent increase in the level of GDP for the average state;
* A 16 to 19 percent increase in new startups for the average state;
* A $4,000 increase in the average wage;
* A significant influx of new high-income taxpayers;
* An average state sales tax of under 8 percent under full revenue replacement with no limits on spending growth;
* An average state tax rate of 6.2 percent under a scenario with spending growth limits.
The remainder of this CEA report discusses extensively each of these points. While the economists who have done studies for the FAIRtax have pointed out many of these points, it is great to see a group as prestigious as the CEA make a compelling case for the elimination of state income taxes and replacing them with consumption taxes. This CEA report is an indicator that serious people are paying attention to what is a growing movement among states for eliminating their state income tax.
What is missing from this analysis is the effect of a family consumption allowance (FCA), the prebate. The FCA allows purchases up to the poverty level to be not subject to the state sales tax.
Alabama and Georgia are contemplating passing a state version of the FAIRtax. One of the reasons that the plans are gaining favorable attention from both sides of the aisle is the inclusion of the FCA ensuring that people in the lower income levels are not adversely affected.
The momentum is growing. As of now Mississippi, Oklahoma, Kentucky, Iowa and Georgia have passed legislation targeting the full elimination of the state income tax. Other states are moving to greatly reduce or eliminate their state income tax.
The other thing that is not directly considered by the CEA report is the effect that the repeal of the federal income/payroll tax system and replacement by a consumption tax, like the FAIRtax, will have on the U.S. If elimination of the state income tax has these benefits, the benefits on the national level will be even more pronounced than at the state level.
The FAIRtax is the answer.
For more information, please go to FAIRtax.org
