President Donald Trump has floated the idea that tariff revenue could eventually replace the federal income tax, according to Politifact.
While such a shift would require congressional action and faces skepticism from economists, the proposal has sparked renewed debate among economists and policy analysts about how eliminating income taxes could affect states. Some states rely more heavily on that stream, making them more exposed under an overhaul.
Will President Trump replace the income tax? If so, here are three states that may suffer the most.
California
California stands out because of how heavily it relies on personal income taxes to fund state operations, per the California Budget & Policy Center.
A large share of the state’s general fund revenue comes from income taxes and its progressive tax structure means a significant portion of that revenue is paid by higher earners. That concentration can amplify exposure if federal income tax policy changes alter taxpayer behavior or incentives.
Unlike states with broader consumption taxes or major severance revenue, California’s revenue depends heavily on personal income tax, which includes income from wages and investment gains, according to the Governor’s Budget Summary. When those sources fluctuate, state revenues tend to move with them.
Pacific Research Institute analysts have long noted that this structure makes California more sensitive to economic cycles and policy shifts that affect taxable income. In a scenario where federal income taxes were reduced or replaced, states with similar revenue profiles could face larger adjustment pressures, even if their own tax codes remained unchanged.
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New Jersey
New Jersey’s exposure is driven less by how it taxes income and more by what its budget is already committed to paying.
According to S&P Global data, the state carries some of the largest pension obligations in the country, along with significant long-term funding requirements for retiree benefits. Those fixed costs limit how quickly the state can adjust if revenue assumptions change.
Even modest shifts in income-tax collections can have outsized effects when a large share of spending is effectively locked in. Pew researchers have long noted that states with high pension and benefit obligations have less fiscal flexibility than peers with lighter long-term commitments.
In a scenario where federal income tax policy were significantly altered, states like New Jersey could face sharper adjustment pressure because there is less room to offset revenue volatility without cutting services or raising other taxes.
Oregon
Oregon’s exposure stems from how narrowly its tax system is structured.
According to Urban Institute data, the state relies heavily on personal income taxes to fund public services and is one of the few states without a general sales tax. That absence limits Oregon’s ability to shift toward consumption-based revenue if income-tax collections fluctuate.
Because there are fewer alternative revenue streams to draw from, changes that affect taxable income tend to have a more direct impact on the state budget. Pew researchers found that states with more diversified tax systems can absorb policy or economic shocks more easily.
In a scenario where federal income tax policy were significantly altered, Oregon’s heavy dependence on income taxes and lack of broad-based consumption taxes could make adjustments more challenging compared with states that have multiple revenue levers available, per Oregon Public Broadcasting (OPB).
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This article originally appeared on GOBankingRates.com: Will Trump Replace the Income Tax? The 3 States That Would Suffer the Most
