The COVID-19 outbreak doomed a 10-year stretch of growth in state tax collections. A final, pre-pandemic ranking shows that tax revenue in all but six states had fully recovered from the Great Recession by the end of 2019—by double-digit gains in half of states but just barely in a few, after adjusting for inflation. Now states have entered a new recession with another tax revenue roller coaster ride ahead.
As of the final quarter of 2019, the last one unscathed by the coronavirus, total state tax revenue had climbed to its highest level since falling during the 2007-09 recession. States collectively took in 18.2% more than when tax dollars peaked in the middle of that downturn just before plunging amid a financial and home mortgage crisis.
Although 44 states had fully recovered their tax collections, all rebounded from their revenue losses at quite different paces and percentages over what became the longest economic expansion in U.S. history—depending on states’ unique economic conditions and policymakers’ decisions to hike or cut taxes. For example, at the end of 2019, North Dakota’s tax collections were 66.7% higher than in 2008, but Missouri had surpassed its peak by only 1.5% and six states still were taking in 3.5% to 86% less, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations.
Each state’s tax collection growth since the last recession helped shape how prepared its finances were for the economic and public health shocks inflicted by the coronavirus in 2020. Extra tax dollars were central to a state’s ability to rebuild its rainy day funds to prepare for the next recession or to catch up on investments and spending that had been cut or deferred during the last downturn.
Tax revenue trends from the 2007-09 recession also provide benchmarks that can help gauge the severity of fallout from this year’s pandemic-induced recession. Early estimates suggest that state tax revenue declines may be sharper in this recession than during the Great Recession. For example, preliminary data from the Urban Institute for March through June 2020 shows that collective state tax revenue fell swiftly and sharply—49% in April 2020, 21% in May 2020, and 13% in June 2020, compared with the same periods last year—as parts of the economy temporarily shut down to curb the spread of COVID-19.
A comparison of tax receipts for the four quarters of 2019 with each state’s peak four consecutive quarters of tax revenue just before or during the 2007-09 recession, adjusted for inflation, shows:
Looming over future collections is the acute economic fallout from the global coronavirus outbreak, which has triggered unprecedented unemployment claims and continuing business shutdowns. These particularly threaten to drastically reduce personal income and sales taxes on which states rely for more than two-thirds of their tax revenue.
State receipts had been healthy leading up to March 2020, when they began to fall largely due to government actions to temporarily close certain businesses and limit the size of gatherings to slow the coronavirus’ spread. According to the latest available estimates from the Urban Institute, at least 35 states reported fiscal year-to-date declines through June 2020. State tax revenue losses were particularly steep in April—49% below the same period a year before—after many states adopted the federal government’s delay of the income tax filing deadline from April 15 to July 15.
Still, because the shortfalls occurred two-thirds of the way through fiscal 2020, the budget year that ended in June for most states, gains during the first eight months were able to help offset budget gaps caused by the public health emergency.
Projections for fiscal 2021 are more dire, with many states anticipating double-digit drops in general fund revenue from pre-pandemic projections. Extrapolating from official revenue projections in 27 states, senior researcher Lucy Dadayan of the Urban Institute estimated on July 1 that the 50 states are likely to face a total tax revenue shortfall of $125 billion in fiscal 2021 compared to pre-recession forecasts.
On a positive note, many states learned a lesson from the last recession and, as their tax revenue grew over the long economic recovery, they built up their rainy day funds to a record $75 billion, which can help them close emerging budget holes. At least 33 states entered this year’s recession with enough savings to cover a greater share of their budgets than they could just before the last downturn.
One of the hallmarks of the Great Recession—thought then to be the worst since World War II—was that state tax revenue recovered unusually slowly, more sluggishly than the recoveries following at least the four previous economic contractions.
Total state tax revenue fell for five consecutive quarters starting in Q4 2008, a full year after the recession officially began, and by as much as 12.5% at its lowest point, after accounting for inflation. Nationally, tax revenue recovered from its losses in mid-2013, after nearly five years. By comparison, tax revenue recovered in just under four years after the so-called tech bust recession in 2001.
Favorable economic conditions and robust stock market returns supported state tax collections for much of the past decade. But for all but the last couple of years, state tax revenue growth was slow, in part because the nation’s economic recovery was the longest on record—at 128 months—but not the strongest. Other factors also held down tax revenue growth, such as declines in oil prices starting in 2014 and consumer spending patterns that have been migrating toward services and online purchases that are less likely to be taxed. Policymakers in some states also cut taxes as receipts started building again. In fact, states collectively enacted tax revenue decreases in four of the past 10 years, according to data from the National Conference of State Legislatures.
Recovery times varied widely among the 44 states that had surpassed their recession-era peaks as of the fourth quarter of 2019. North Dakota was the first state to surpass its recession-era peak, in 2010—after just six quarters (1.5 years)—while Michigan and Virginia each took 47 quarters (11.75 years) to recover their tax revenue losses from the downturn. States that tracked closely with the national trend of 19 quarters (4.75 years) include Connecticut, Hawaii, Massachusetts, and Wisconsin.
But even states that surpassed their recession-era peaks faced budget strains during the recovery. Many states saw their first budget surpluses in years only in fiscal 2018 and 2019. Tax revenue spikes in those years coincided with two recent federal policy actions—the U.S. Supreme Court’s 2018 decision paving the way for states to collect online sales taxes and the 2017 federal Tax Cuts and Jobs Act (TCJA). Because of the way state and federal tax codes are linked, the TCJA’s federal tax code changes led to higher state tax bills for some residents and businesses, unless states counteracted them.
Meanwhile, spending demands did not stand still. For example, Medicaid enrollment rose by 62.8% from 2007 to 2018, according to data from the Medicaid and CHIP Payment and Access Commission. Population increases and pressure to restore cuts made during the last recession to infrastructure, public schools and universities, the number of state workers, and support for local governments also have squeezed state finances.
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 41.2% above peak and tax collections had recovered in 48 states—all except Alaska and Wyoming—as of the fourth quarter of 2019. 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 2019. 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.
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