How sales taxes can burden those with the lowest incomes

After Republican gubernatorial candidate Jack Ciattarelli expressed openness to raising the sales tax in New Jersey to 10%, experts say the plan would be disastrous for lower income residents.

In an audio recording from a June rally, Ciattarelli said he’s open to changing the way taxes work in the state, which could include increasing the sales tax — he mentioned the 10% sales tax he’d encountered during a fundraising trip to Tennessee — or eliminating the state’s income tax. Ciattarelli later denied support for a 10% sales tax, telling the NJ Advance: “I think all options should be on the table. But that doesn’t mean I’m putting in a 10% sales tax, including on food and clothing.”

New Jersey currently has a 6.625% state sales tax rate, which is expected to account for about 26% of its total projected revenue during the 2025-2026 fiscal year. According to the state’s 2025-2026 tax and revenue outlook, New Jersey is projected to take in approximately $21 billion in income tax revenue during the current fiscal year, amounting to about 37% of its total projected revenue during that time frame. Only eight states have no income tax and rely heavily on sales tax.

Aidan Davis, state policy director for the Institute on Taxation and Economic Policy, says the organization’s studies have found that states reliant on sales tax largely have highly unequal tax structures: When sales tax replaces income tax as a key source of revenue, lower-income taxpayers end up paying a far greater percentage of their income in taxes than higher-income taxpayers.

“We found that eight of the 10 states with the most regressive tax systems, meaning that they asked the most of low- and middle-income families as a result of the way that they levy their state and local taxes, they rely heavily — very heavily — on sales and excise taxes,” she said. “They derive more than half of their tax revenue from these taxes compared to the national average, which is more in line with about a third.”

ITEP in fact ranks Tennessee as having the third-most regressive tax system in the nation, with the poorest 20% of residents losing 12.8% of their income to state and local taxes while the top 1% pay just 3.8% of their income in those taxes.

In New Jersey, the current picture is much more even: The poorest 20% of New Jerseyans pay 8.8% of their income in state and local taxes, and the wealthiest 1% pay 10.5%.

“There’s this feeling that certain kinds of states are just mentally categorized as low-tax states, but they’re not often low-tax states once you add it all up for lower-income and moderate-income households,” said Peter Chen, senior policy analyst at New Jersey Policy Perspective. “Oftentimes their tax rates are the same or even higher than New Jersey’s, once you factor those in, and that’s not even accounting for the quality of services that are being received, the quality of the education system. What they’re really talking about when they say high-tax and low-tax state is high-tax for the wealthy as opposed to low-tax for the wealthy.”

Having no state income tax might look appealing, Chen said, but at the individual level for low-income earners, residents of states like Tennessee often find themselves squeezed.

“You might think to yourself, Hey, that’s looking good if I’m making less than $30,000 a year, but New Jersey has a refundable earned-income tax credit and child tax credit,” he said. “So for many households making less than $30,000 a year, the income tax is actually a way for them to get money back from the government, rather than paying more in taxes. And so New Jersey at the lowest-income scale actually has a negative income tax, such that you’re getting money back, probably in the area of $300-$500 in the $30,000 range, but you’re getting money back from the government in that range.”

Chen also said states like Tennessee that rely heavily on one source of tax income also open themselves up to revenue crunches.

“State governments are most stable when they can rely on a wide range of income sources, of revenue sources, because solely relying on one revenue source can be disruptive if those revenues change because of a change in consumer behavior, because of a recession, because of inflation,” he said.

He said sales tax-reliant structures don’t necessarily have an impact on consumer spending itself — but that’s because for the lowest earners, much of their spending isn’t optional.

“Often at the very at the lower end of the income scale, consumption is not discretionary,” Chen said. “Most consumption is mandatory in one form or another. You need food, you need clothes, you need shelter, right? And those make up the biggest — you know, health care. These make up the biggest portion of overall consumption costs. And so they’re not really negotiable.”

Davis said tax structures like the one in Tennessee leave the poorest earners holding much of the state funding burden.

“For low- and middle-income families, so much more of our incomes and just our ability to spend money goes into things that we need, so we’re spending it on housing, on food, on basics for living,” she said. “Once you get higher and higher up the income scale, you have a lot more resources to be able to buy those things, but then have a ton of other money that you can use in other ways. When we’re talking about especially the very poorest families, they don’t have that flexibility. They’re spending all their income, and sometimes plus, through credit or other things.”