The potential shift from federal income tax to tariff revenue, championed by former President Donald Trump, has ignited debate among economists and policy analysts. While the proposal faces significant hurdles in Congress, it raises serious questions about how states reliant on income tax revenue would adapt. Three states—California, New Jersey, and Oregon—stand out as particularly vulnerable.
California’s High-Income Dependence
California’s state budget is heavily dependent on personal income taxes, especially from high earners. This reliance creates a concentrated revenue stream that’s easily disrupted by federal tax policy changes.
Unlike states with diversified revenue sources, California’s finances are tightly linked to income fluctuations.
According to the California Budget & Policy Center, income taxes make up a substantial portion of the state’s general fund. Reducing or eliminating federal income taxes could alter taxpayer behavior, leading to lower state revenues. The Pacific Research Institute highlights that this makes California more sensitive to economic cycles and policy shifts, leaving it exposed to larger adjustment pressures.
New Jersey’s Pension Burden
New Jersey’s vulnerability isn’t about its tax structure, but its pre-existing financial obligations. The state carries massive pension obligations and long-term retiree benefits. According to S&P Global, these fixed costs severely limit fiscal flexibility.
Even modest shifts in income tax collections could have outsized effects on a state with so much already committed to spending.
Pew researchers note that states with high pension liabilities have less capacity to absorb revenue volatility. A significant change in federal income tax policy could force New Jersey into difficult trade-offs: cutting services or raising other taxes.
Oregon’s Lack of Alternatives
Oregon’s exposure stems from its narrow tax structure. The state relies heavily on personal income taxes and is one of the few without a general sales tax. This absence limits its ability to shift to consumption-based revenue if income tax collections decline.
With fewer revenue streams to draw from, changes affecting taxable income hit Oregon’s budget directly.
Urban Institute data confirms this dependence. Pew research shows that states with diversified tax systems are better equipped to handle policy shocks. In a scenario where federal income taxes are altered, Oregon could struggle to adjust compared to states with multiple revenue levers available, as noted by Oregon Public Broadcasting (OPB).
Conclusion:
If Trump’s tariff plan gains traction, California, New Jersey, and Oregon face distinct but significant financial risks. Their reliance on income tax revenue, combined with existing obligations or a lack of alternatives, could force painful adjustments. The debate over federal tax reform is not just an economic discussion; it’s a matter of state fiscal stability.
