Pew’s Fiscal 50: State Trends and Analysis presents 50-state data on key fiscal, economic, and demographic indicators and analyzes their impact on states’ long-term fiscal health.
States faced a steep drop in tax dollars amid increased spending demands as the coronavirus pandemic abruptly ended the longest U.S. economic expansion on record in early 2020—and with it a promising stretch for states’ finances. Pandemic-induced business shutdowns and city lockdowns triggered a historic contraction in the U.S. economy and presented states with their most challenging fiscal and economic tests since the Great Recession of 2007-09.
Some states were in a better position than others to confront the public health emergency and the new recession. A spurt of healthy tax receipts just before COVID-19 struck—after years of slow revenue growth—helped as states were faced with higher spending to fight the pandemic amid lower tax collections as people lost jobs and the economy slowed. The recession and the virus affected states unevenly, however, and budget challenges are expected to persist at least through the end of 2022 in some states.
The surge in tax revenue in 2018 and 2019 had allowed many states to add to their rainy day funds—which at the start of the pandemic amounted nationally to states’ largest cushion in at least two decades. At least 15 states tapped into those savings to balance their fiscal 2020 budgets.
The economy began a wobbly recovery from the pandemic in the third quarter of 2020. Every state reported higher total personal income than a year earlier, though much of the boost was from unprecedented federal assistance for businesses and unemployed workers, and other relief intended to keep the economy afloat. A crushing wave of job losses, particularly among lower-wage workers, battered a job market that had only recently recovered. Nationally, the percentage of adults in their prime working years who held jobs had finally recovered at the end of 2019 from losses incurred in the last downturn, although nearly half of states were still below pre-Great Recession levels.
Pandemic Drives Historic State Tax Revenue Drop. Total state tax revenue was down $46.4 billion, or 4.3%, from its pre-pandemic level in the four quarters ending June 30, 2020—the past budget year for nearly all states. Although tax receipts suffered from the acute economic fallout of the pandemic, much of the decline was due to the postponed deadline for filing personal and corporate income taxes. Collections had been growing in most states until the COVID-19 outbreak but then took their steepest plunge in at least 25 years in the final quarter. Although some of this drop was expected to be recovered in the following quarter of 2020, nearly half of states project revenue declines this fiscal year. View the indicator or print the analysis.
COVID-19 Prompts States To Start Tapping Financial Reserves. At least 17 states made or authorized withdrawals from their rainy day funds in fiscal 2020 to help mitigate the acute fiscal shocks driven by the coronavirus pandemic. Going into this new recession, states collectively had amassed their largest fiscal cushion in at least two decades. Nationwide, states held record amounts at the close of fiscal 2019 in both rainy day funds and total balances, which include dedicated savings and money left over at the end of the fiscal year. View the indicator or print the analysis.
Despite Diminishing Federal Aid, Total Personal Income Beat Last Year’s. Total personal income was higher in every state in the third quarter of 2020 than a year earlier even as the COVID-19 pandemic continued to disrupt the economy. In most states it was propped up by substantial government assistance that helped residents and businesses combat the effects of the pandemic, even though the aid subsided somewhat from earlier in the year. Without government aid, 27 states would have experienced overall declines. View the indicator or print the analysis.
State Employment Recovered Unevenly From Last Recession. On the verge of a new recession, the U.S. employment rate in 2019 for adults of prime working age finally recovered from losses triggered by the Great Recession. But the percentage of 25- to 54-year-olds with a job still fell short of pre-recession rates in nearly half the states, leaving some at an economic disadvantage when the COVID-19 pandemic triggered a new downturn. Compared with 2007, the prime-age employment rate increased the most in Michigan, while New Mexico recorded the largest decline among states. View the indicator or print the analysis.
The coronavirus pandemic is expected to intensify two challenges already facing states by increasing costs for Medicaid, the health care program that is most states’ second-biggest budget expense, and triggering swings in volatile tax revenue, which can confound policymakers’ efforts to balance budgets.
Meanwhile, states continued to face fiscal pressures from inherited shortfalls in funding for public employees’ pension and retiree health care benefits; recurring deficits between annual state revenue and expenses; and weak population growth, which can diminish economic prospects and revenue collections.
One lifeline for states continued to be federal dollars, which made up roughly one-third of all state revenue before the latest economic shock led to a boost in federal aid to states.
States Collectively Spend 17 Percent of Their Revenue on Medicaid. Medicaid consumed a greater portion of states’ own money in nearly every state between fiscal 2000 and 2017. States’ increases varied widely, however, from less than 1 cent to nearly 12 cents more per dollar of state-generated revenue, exerting different degrees of budget pressure. Medicaid’s claim on state revenue surged in the wake of the Great Recession, after temporary federal economic stimulus dollars expired but before the federally funded expansion of Medicaid eligibility began, and has remained stable since. Medicaid is most state governments’ second-biggest expense, after K-12 education. View the indicator or print the analysis.
Tax Revenue Swings Complicate State Budgeting. All states experience swings in their tax revenue from year to year, but some fluctuate more than others, leading to surprise shortfalls or windfalls that can make it hard for policymakers to manage budgets. During the 20 years ending in fiscal 2019, Alaska recorded the greatest volatility and South Dakota the least, after removing the effects of state tax policy changes. Taxes on oil and mineral extraction and corporate income were consistently more volatile than other major tax streams. In 2020, the coronavirus pandemic has left no major tax revenue streams unscathed, introducing another dose of volatility. View the indicator or print the analysis.
Long-Term Obligations Vary as a Share of State Resources. Unfunded pension benefits were the largest, most prominent, and fastest-growing of a selection of future costs facing states as of 2013. States reported $968 billion in unfunded pension costs—the equivalent of 6.9 percent of 50-state personal income, as well as $587 billion in unfunded retiree health care liabilities (4.2 percent of personal income) and $518 billion in outstanding debt (3.7 percent). If not properly managed, these costs can limit future budget flexibility and raise borrowing costs. View the indicator or print the analysis.
9 States Struggle With Long-Term Fiscal Imbalances. Even in the aftermath of two recessions, most states amassed sufficient revenue between fiscal years 2004 and 2018 to cover all their expenses. But total revenue in nine states fell short, jeopardizing those states’ long-term fiscal flexibility and pushing off to future taxpayers some past costs for operating government and providing services. States can withstand periodic deficits without endangering their fiscal health over the long run. But chronic shortfalls are one indication of a more serious, unsustainable structural deficit in which revenue will continue to fall short of spending absent policy changes. View the indicator or print the analysis.
Western, Southern States Gain Residents the Fastest. All but two states—Illinois and West Virginia—added residents over the past decade, with those in the West and South growing fastest. Still, population growth is estimated to have slowed nationally and in most states over the past 10 years, continuing a long-term trend. In 2018 alone, nine states had fewer residents than a year earlier. Population changes are tied to states’ economic fortunes and government finances, and are therefore useful for understanding both. View the indicator or print the analysis.
Federal Funds Hover at a Third of State Revenue. The federal government is the second-largest source of state revenue—accounting for 32.4 percent of the total in fiscal 2017—meaning that federal budget decisions also play a key role in state budgets. But states’ reliance on federal funds varies widely, ranging from about 21 percent of revenue in Hawaii to more than 46 percent in Montana. The share of states’ revenue made up by federal dollars in fiscal 2017 was the fourth-largest on record. View the indicator or print the analysis.