Despite Year-End Dip, State Tax Revenue Is Still High

Note: These data have been updated. To see the most recent data and analysis, visit Fiscal 50.

State tax revenue fell slightly in the fourth quarter of 2018, trimming the number of states in which collections had fully recovered from the Great Recession to 40, one less than the record high a quarter before, after accounting for inflation. The dip interrupted one of the strongest stretches of growth since the downturn, though fresh gains were projected for the first half of 2019.

While state tax revenue fell slightly in late 2018—the first quarterly decline in two years—collections were near historic highs: 12.6 percent above their 2008 peak, after adjusting for inflation, just below a record 13.4 percent in the previous quarter.

The results mean that states collectively had the equivalent of 12.6 cents more in purchasing power for every $1 they collected at their recession-era peak more than a decade earlier, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations.  

State tax revenue turned a corner in late 2017 after the weakest two years of growth—outside of a recession—in at least 30 years. Revenue collections have been boosted in part by the 2017 federal Tax Cuts and Jobs Act—which cut federal income tax rates but increased what many individuals and businesses owed to state tax collectors—as well as by favorable economic conditions, state policy actions, and robust stock market returns in late 2017 through much of 2018.

The 2017 revisions to the U.S. tax law introduced uncertainty into state collections trends as both states and taxpayers adjusted to the federal changes. The result is that at least some of states’ recent tax revenue gains could be short-lived.

For instance, the new federal tax law temporarily inflated state collections at the end of 2017 by incentivizing individuals and corporations to shift the timing of income and payments to try to lower their tax bills. The most recent tax revenue dip resulted when state collections at the end of 2018 were lower by comparison. One-time gains in some states in late 2017 also came from a deadline for hedge fund managers to pay taxes on offshore earnings during the same year. 

In addition, most states collected more tax dollars in 2018 in part because of the way their tax codes link to federal tax law, though some states have acted to counteract these gains. The law cut federal tax rates but increased the amount of income subject to taxation, automatically increasing many state taxpayers’ liabilities unless policymakers acted to neutralize the unlegislated state tax hikes. At least eight states reduced their tax rates on personal income– the largest source of tax revenue for states—in 2018 to return portions of their windfall to individual taxpayers. Others have delayed a decision or are still grappling with the full implications of the federal changes on their collections. Further, many states have yet to address changes to corporate income provisions—both domestic and international—whose effects on state tax revenue remain uncertain.  

Just 10 states collected less in inflation-adjusted tax dollars than at their peak before collections plunged in the recession. Revenue in these states was still below its recession-era peak for a variety of reasons, including state tax cuts, weak economic growth, volatile energy prices, or an unusually high tax revenue peak before the downturn.  

But even states that have surpassed their recession-era peaks had to deal with years of slow revenue growth before the recent spike, leaving many governments with little extra to cover costs associated with population increases and other fiscal strains, such as growth in Medicaid expenses, deferred spending, and accumulated debts and liabilities.

Total state tax revenue rebounded more slowly after the 2007-09 recession than it did after any of the three previous downturns. But trends have varied widely by state. In 16 of the 40 states in which collections had recovered from their recession losses by the fourth quarter of 2018, tax revenue—and thus purchasing power—was more than 15 percent higher than at its peak before or during the recession. Conversely, collections were down 15 percent or more in two of the 10 states in which tax revenue was still below peak.

As states regain fiscal ground lost in the recession, policymakers face pressure to catch up on investments and spending postponed because of the downturn. That may be more difficult in states where tax revenue remains below its previous peak.

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State highlights

A comparison of tax receipts in the fourth quarter of 2018 with each state’s peak quarter of revenue before the end of the recession, averaged across four quarters and adjusted for inflation, shows:

• North Dakota remained the leader among all states in tax revenue growth since the recession, although its collections have swung dramatically along with the price of oil during the same period. At the end of 2014, receipts hit a high of 123.9 percent above their peak during the recession, compared with 70.9 percent above in the fourth quarter of 2018.
• Fifteen other states posted tax revenue rebounds of 15 percent or more: Colorado (34.4 percent), Oregon (29.2), Washington (25.6), Minnesota (25.3), California (24.9), Hawaii (24.7), Nevada (23.4), South Dakota (22.1), Maryland (20.5), Illinois (18.9), Kansas (16.9), Connecticut (15.9), Texas and Tennessee (each 15.7), and Massachusetts (15.6).
• Alaska (-83.0 percent) was furthest below its peak. This means the state collected only about 17 percent as much in inflation-adjusted tax dollars as it did at its short-lived peak in 2008, when a new state oil tax coincided with record-high crude prices. Without personal income or general sales taxes, Alaska is highly dependent on oil-related severance tax revenue, which began falling even before worldwide crude prices declined in 2014 as its oil production waned.
• One additional state was down more than 15 percent from its previous peak: Wyoming (-36.2 percent).
• Other states still below their peaks were Florida (-8.1), Ohio (-7.1), New Mexico (-4.4), New Jersey (-4.0), Oklahoma (-2.8), Louisiana (-2.0), Mississippi (-1.0), and Missouri (-0.2 percent).

Latest trends

Overall tax revenue fell 2.9 percent in the fourth quarter of 2018 compared with a year earlier, breaking a string of strong quarterly increases. The drop was driven by an 11.2 percent fall in personal income tax receipts—the first double-digit decline since the recession, according to data from the Urban Institute. Twenty states had year-over-year declines in total tax revenue, though many states had anticipated lower collections because of the one-time surge in tax dollars at the end of 2017.

The drop in personal income tax revenue at the end of 2018 dwarfed rising sales and corporate income tax collections, which were up 2.3 percent and 8.5 percent, respectively. Severance tax revenue also rose, buoyed by a 100-year high in U.S. oil production.  

According to preliminary figures collected by the Urban Institute, the recent drop in tax revenue was expected to be eclipsed by new gains in the first quarter of 2019 followed by the largest spike in personal income tax dollars during the month of April in a decade. However, Urban notes that this spike was likely another one-time occurrence due to taxpayers waiting to file their taxes until the last minute as they worked to better understand how the new federal tax law affected them.

Future growth might not be as strong as the short-term effects of the federal tax changes diminish, while economic growth is expected to slow. Stock market volatility along with a global economic slowdown and the impacts of U.S. trade uncertainty also threaten to dampen tax revenue growth.

Trends since the recession

State tax revenue—like the U.S. economy—has grown slowly and unevenly since the recession. After states’ tax collections bottomed out after the recession, the number of states that have regained their tax revenue levels has risen and fallen, reflecting volatility in state tax collections as well as tax policy changes.

Nationally, tax revenue recovered from its losses in mid-2013, after accounting for inflation. But individual state results have differed dramatically depending on economic conditions, population changes, and tax policy choices since the recession. For example, state policymakers have enacted tax cuts in states such as North Carolina and Ohio and hikes in states such as California and Illinois since the recession. According to the National Association of State Budget Officers, states enacted $3.1 billion in net tax increases for fiscal 2019 following nearly $10 billion in hikes for the previous year. These increases follow much smaller rises in the previous two fiscal years and net tax cuts of roughly $2 billion in each of fiscal years 2014 and 2015.

In 2010, North Dakota was the first state to surpass its recession-era peak, followed by Vermont, Illinois, New York, and West Virginia by mid-2011. Tax receipts were above peak in 15 states at the end of 2012; 22 states at the end of 2013; 21 states at the end of 2014; 30 states at the end of 2015; 31 states at the end of 2016; 33 states at the end of 2017; and 40 states at the end of 2018.

State budgets do not adjust revenue for inflation, so tax revenue totals in states’ documents will appear higher than or closer to pre-recession totals. Without adjusting for inflation, 50-state tax revenue was 32.5 percent above peak and tax collections had recovered in 48 states—all except Alaska and Wyoming—as of the fourth quarter of 2018. Unadjusted figures do not take into account changes in the price of goods and services.

Adjusting for inflation is just one way to evaluate state tax revenue growth. Different insights would be gained by tracking revenue relative to population growth or state economic output.

Download the data to see individual state trends from the first quarter of 2006 to the fourth quarter of 2018. Visit The Pew Charitable Trusts’ interactive resource Fiscal 50: State Trends and Analysis  to sort and analyze data for other indicators of state fiscal health.