Tax Revenue in 21 States Outperformed Pre-Pandemic Growth

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Tax Revenue in 21 States Outperformed Pre-Pandemic Growth

Editor’s note: This article is a regular update to the tax revenue indicator for Pew's Fiscal 50 project.

In a remarkably fast recession turnaround, tax revenue in nearly half of states has not only recouped its initial losses from the downturn, but also outperformed its pre-pandemic growth trends when receipts from the past two fiscal years are combined. Temporary factors played a major role in these unexpected gains, but they don’t fully explain a surge of budget surpluses.

During the eight quarters ending June 30, 2021—the past two budget years for most states—38 states accumulated as much or more tax revenue as they would have raised had collections held steady at pre-pandemic levels over the same period, after adjusting for inflation. This means that three-quarters of states took in enough tax dollars to offset their early 2020 pandemic losses by the start of this budget year.

On top of that, 21 of those states collected even higher tax receipts over the combined past two fiscal years than they would have raised if their pre-pandemic growth trends had continued, after adjusting for inflation, despite fallout from the coronavirus and a two-month recession. According to Pew estimates, Idaho led all states with 9.5% more cumulative tax revenue than it would have collected under its pre-pandemic growth rate. Illinois was second, at 4.7% above trend.

Still, estimates show that cumulative tax revenue fell short of its pre-COVID trend in more than half of states over the first two fiscal years marred by the pandemic—suggesting less extraordinary growth than the recent spate of budget surpluses and tax cut proposals might otherwise indicate. Looking at trends over a slightly longer period—like this two-year window—provides an alternative view of the strength of state tax revenue other than recent budget surpluses, which are based on annual flows of not just revenue but also spending. Alaska was furthest behind, with collections estimated at 28.1% below its pre-pandemic growth trend, and North Dakota was next-lowest at an estimated 14.1% below trend. Both states had also yet to take in enough tax dollars to offset their initial losses. Nationally, despite above-trend growth in nearly half of states, combined tax revenue was 0.6% below estimates of what might have been collected without the pandemic.

Many states have already signed into law a variety of tax cuts in the wake of recent budget surpluses. Of the 18 states that enacted tax cuts as part of their fiscal 2022 budgets, combined tax revenue over the past two fiscal years underperformed its pre-pandemic growth trend in 10 of them, according to Pew’s estimates.

Variation in the size and speed of states’ revenue rebounds was due to a mix of factors, including each state’s economic makeup, the share of jobs that could be performed remotely, the mix and structure of taxes imposed, and differences in COVID-19 caseloads and public health restrictions, such as temporary business closures and limits on the size of gatherings. 

Looking at cumulative totals over the past two fiscal years offers a way to identify states in which tax revenue has either out- or under-performed its pre-pandemic trends since COVID-19 hit and provides an alternative to the often astonishing quarterly and annual percentage increases that were skewed by a particularly volatile time in state tax revenue. For each of the eight quarters ending June 30, 2021, Pew calculated the difference between actual tax revenue and estimates of how much each state would have collected in the same period had revenue grown at its pre-pandemic, five-year average annual growth rate.

This approach, in particular, smooths out distortions in tax revenue trends caused by a delay in the 2020 income tax filing deadline from April to July. The shift in timing inflated fiscal 2021 totals and percentage increases in roughly half of states. For instance, states that booked the delayed income tax payments during the first quarter of fiscal 2021 had a 16.9% year-over-year growth on average, whereas states that applied the delayed payments to the previous budget year had a 9.3% growth on average in fiscal 2021—an 81% difference.

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State highlights

A comparison of inflation-adjusted tax revenue in the eight quarters ending June 30, 2021, and estimates for the same period had collections grown at their pre-pandemic, five-year average annual growth rate shows:

  • Idaho’s tax revenue outperformed that of all states—posting 17.3% more in collections over the past two fiscal years than it would have raised had revenue held at fiscal 2019 pre-pandemic levels—and outperforming its five-year pre-pandemic growth trend by 9.5%, the only state with a gain of more than 5% above trend. Personal income tax gains drove overall revenue growth. Idaho also recorded the fastest-growing population among states in the past two years. The state enacted multiple tax cuts as part of its fiscal 2022 budget and a second major round in February of this year.
  • Behind Idaho, the states with the next-strongest tax revenue gains compared with their pre-COVID growth trends were Illinois (4.7%), Utah (3.6%), Vermont (3.6%), Maine (3.4%), and South Dakota (2.5%).
  • Among the 38 states that took in enough revenue to make up for their initial losses, collections remained below their pre-COVID growth trends in 17 of them: Arizona, Delaware, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, Pennsylvania, South Carolina, Virginia, Washington, and Wisconsin.
  • Twelve states had yet to take in enough tax revenue to offset their initial pandemic losses, much less catch up to their pre-pandemic growth trends: Alaska, Connecticut, Florida, Hawaii, Nevada, New Hampshire, North Dakota, Oklahoma, Oregon, Texas, West Virginia, and Wyoming. Since the outset of the pandemic, natural resource-dependent states, such as Alaska, North Dakota, and Wyoming, and those reliant on tourism, such as Hawaii and Nevada, have had some of the deepest declines in tax revenue.
  • Of the 18 states that enacted tax cuts as part of their fiscal 2022 budgets, eight outperformed their pre-COVID growth trend: Georgia, Idaho, Montana, Nebraska, Ohio, Tennessee, Utah, and Vermont; and 10 underperformed—Arizona, Delaware, Iowa, Kansas, Louisiana, Minnesota, Missouri, New Hampshire, Oklahoma, and Wisconsin.

What drove budget surpluses?

On its own, fiscal 2021 is not an accurate harbinger of future revenue collections because receipts were inflated by one-time and temporary factors. Beyond the shift in the income tax filing deadline, two other major factors contributed to a temporary high during last budget year: unprecedented amounts of federal aid to individuals and businesses in the form of stimulus checks, supplemental unemployment benefits, expanded child tax credits, and forgivable business loans, plus a shift in personal spending from often-untaxed services to purchases of goods, which are taxable in most states. Although states project overall growth to continue, forecasters expect gains to become more moderate as these key factors have either ended or are diminishing.

Tax revenue is just one factor that helps explain recent widespread state budget surpluses. Large end-of-year balances also were driven in part by a combination of unprecedented amounts of federal aid to state governments—the second-largest source of revenue for states—that replaced spending from states’ own dollars, and states underestimating the speed and strength of their recoveries so far.

Since the COVID-19 pandemic led to a historic contraction in the U.S. economy in February 2020, the federal government has pumped hundreds of billions of dollars into states’ budgets to help offset increased spending on pandemic response and to help stabilize their finances. (Note: These funds were separate from those provided to individuals and businesses.) In many cases, additional federal funds were able to free up state dollars that could be used to meet spending demands elsewhere in the budget and soften the blow to states’ own resources.

Separately, revenue forecasting—which underpins the state budgeting process—was tremendously challenging for states given the high degree of uncertainty surrounding the course and severity of the virus, how states’ tax revenues would be affected, and the availability of federal aid. In the face of such unpredictability, many states—according to the National Association of State Budget Officers—forecasted multiyear revenue declines on par or worse than what states experienced because of the Great Recession. However, tax revenue nationally recovered remarkably swiftly by both historical standards—approximately five times as fast as after the Great Recession—and compared with what forecasters had built into their fiscal 2021 budgets. The combination of dire forecasts at the outset of the pandemic, spending reductions in some states, and a faster-than-expected revenue recovery not only led to widespread surpluses, but also to the largest annual increase in leftover general fund budget dollars in fiscal 2021 in at least the past 20 years.

To be sure, the pandemic’s sudden onset and widespread disruptions to daily life in early 2020 triggered a sharper decline in total state tax revenue than was recorded during at least the past two recessions—although total losses were not as deep, and the recovery got off to a quicker start.

Tax revenue losses were not as dire as initially expected thanks to factors such as federal aid that helped support businesses and unemployed workers, a quicker stock market recovery and fall in unemployment rates than originally anticipated, the relatively recent authority of states to collect online sales taxes, and job stability in higher-wage professions that were able to pivot to remote work.

No more than a year after state tax revenue took its steepest plunge during a single quarter in at least 25 years, total collections were 11.8% above their 2019 pre-pandemic levels by the end of the second quarter last year, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations, amid robust growth from all major sources of tax revenue. Of course, this increase was bolstered by the temporary factors discussed above.

The bulk of the historic increase was driven by a spike in personal income tax receipts, the largest source of total state tax revenue. Much of this growth was a result of the shift in the income tax filing deadline, although robust stock market returns and employment growth also played major roles. 

The other major tax revenue source for most state governments—sales taxes—also increased over the same period. The gains were driven not only by federal aid, which temporarily propped up state personal income and consumer spending, but also a shift in consumer spending from services to purchases of goods and by states’ new authority to collect sales taxes on online purchases.  

In states with significant fossil fuel production, rising energy prices have buoyed related severance tax revenue following a historic drop shortly after the pandemic’s outset. Moody’s Investor Service, for example, estimates that Alaska’s severance tax collections—the largest tax revenue source for the state—would more than double this fiscal year compared with last year due to rising oil prices.

Looking just at collections during the four quarters ending June 2021—the past fiscal year for most states—tax revenue in 44 states had rallied to 2019 pre-pandemic levels, after adjusting for inflation. Collections were 20% or higher in California, Idaho, and Utah, while just six states collected less tax dollars: Alaska, Hawaii, Nevada, North Dakota, Oklahoma, and Wyoming. Declines in these states since the end of 2019 were driven largely by drops in severance taxes on oil and minerals or sales taxes on goods and services.

State budgets do not adjust revenue for inflation, so percentage changes presented here may differ from tax revenue figures in states’ documents. Adjusting for inflation is just one way to evaluate state tax revenue changes. Different insights would be gained by tracking revenue relative to population growth or state economic output.

The fiscal year ends June 30 in all but four states: New York (March 31), Texas (Aug. 31), and Alabama and Michigan (both Sept. 30). For the purposes of this analysis, though, to standardize calculations, fiscal year trends were estimated using the period from July 1 to June 30 for all states.

Download the data to see individual state trends, and 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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Fiscal 50: State Trends and Analysis, an interactive resource from The Pew Charitable Trusts, allows you to sort and analyze data on key fiscal, economic, and demographic trends in the 50 states and understand their impact on states’ fiscal health.

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