The FairTax Act of 2025 (H.R. 25) is a comprehensive proposal that would replace the federal income tax with a single national retail sales tax, effective in 2027. Introduced by Rep. Buddy Carter (R-GA), the bill would overhaul the U.S. tax system, shift tax collection to state agencies, and abolish the Internal Revenue Service by 2029.
Under the FairTax Act of 2025, federal income tax, payroll taxes for Social Security and Medicare, estate taxes, and self-employment taxes would be eliminated. In their place, individuals and businesses would pay a 23 percent national sales tax on new goods and services. Business-to-business transactions and used goods would generally be exempt from taxation.
According to Congress.gov, the legislation's goal is to simplify compliance procedures and make taxation more transparent. “The Family Consumption Allowance shall ensure no American pays federal tax on necessities,” the bill text states. The proposal would also require states to manage collections, much like they already do for their own state sales tax rates.
Tax collection under the FairTax plan would mirror existing state processes in places such as South Dakota, New Mexico, and Tennessee, where state tax divisions already handle local revenue. Each state’s taxation office would collect the new federal sales tax alongside its own state rate, then remit those funds to the federal government. In exchange, states would receive a small administrative fee for their role in processing and compliance.
States without existing sales taxes—such as Oregon, Montana, and New Hampshire—would need to create new systems, teams, and training programs to manage collections. Local governments, counties, and cities would also need updated tools and data tables to ensure accurate reporting and compliance with new federal regulations.
The FairTax Act would apply to most consumer services, including professional, financial, and digital services that are currently exempt from taxation under federal law. According to the proposal, government purchases at all levels would be subject to the tax to maintain fairness across jurisdictions.
Every household would receive a monthly “prebate,” officially called the Family Consumption Allowance, to offset the sales tax paid on spending up to the federal poverty level. The Social Security Administration would make payments. For example, a family of four would receive a monthly credit designed to make essential spending effectively tax-free.
If the plan is enacted, a $100 purchase would include $23 in federal tax, bringing the total to $123. Business purchases for resale or production would remain exempt, preventing double taxation within the supply chain.
Critics note that the transition could lead to short-term inflation as companies adjust their prices to reflect the new tax. However, supporters argue that removing income tax, payroll deductions, and compliance costs will balance out the effect on most taxpayers.
The FairTax Act of 2025 presents significant administrative and policy challenges for both federal and state tax systems. States would need updated software, accounting tools, and employee training to manage new federal sales tax collections. Businesses in states such as Illinois, Alabama, and Maryland would need to adjust their accounting procedures and compliance processes to reflect changes in tax rates and reporting requirements.
The proposal also depends on repealing the 16th Amendment within seven years, a step requiring broad approval from Congress and state legislatures. Policy directors warn that variations in state sales tax rates and regulations—from California to Washington—could complicate uniform enforcement. These issues highlight the complexity of coordinating a national tax law across diverse state systems and existing revenue structures.
If enacted, the FairTax Act of 2025 would replace income-based taxation with a nationwide sales tax, reshaping how Americans and businesses meet their tax obligations. State and local governments would take on greater responsibility for collections, compliance, and revenue administration under the new tax system.
The Treasury Department and state revenue offices would need to coordinate to maintain accuracy and prevent evasion, as differences in state sales tax rates could create disparities across regions. Tax professionals note that states such as California, Vermont, Utah, and Mississippi may see varying total rates based on how local and federal taxes align. Businesses are advised to prepare for new accounting processes and reporting standards as Congress continues to evaluate the proposal.
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