Falling Tax Revenue Drags More States Below Long-Term Trends

Total state tax collections have been on a downward trajectory since their mid-2022 peak, marking a significant departure from the unexpectedly high tax revenue that states realized in the second and third budget years of the COVID-19 pandemic. Most recently, state annual inflation-adjusted tax revenue fell in fiscal year 2023 compared with the prior year—the only time in at least 40 years that real annual revenue has declined outside of a recession.

During the second quarter of 2023—the final quarter of the budget year for most states—total state tax revenue was 1.2%, or $4.2 billion, below its 15-year trend, after adjusting for inflation and smoothing for seasonal fluctuations. The collective dip can be partially attributed to a deferral of the April income tax filing deadline until November for California residents in response to the state’s severe 2022-23 winter storms. This one-time delay pushed large sums of the state’s personal and corporate income tax payments into the next fiscal year. Excluding California, aggregate state tax collections remained above their collective long-term trend.

Even so, 45 states reported lower year-over-year inflation-adjusted tax revenue in the second quarter of 2023, with declines ranging from 59% in Alaska, 36.5% in California, and 23.7% in New York to less than 1% in Florida, South Dakota, and Texas. The decreases in New York and California accounted for just over half of the total declines nationally and reflected, in large part, stock market volatility that led to reduced capital gains tax collections. Recently enacted personal income tax cuts and the implementation of a new pass-through entity tax also lowered collections in New York, and a substantial slowdown in initial public offerings contributed to California’s decline.

Despite these decreases, tax revenue levels remained above their 15-year trajectories in 32 states during the second quarter, reflecting their relative overall strength and the scale of the pandemic highs from which collections have descended.

Five states bucked the national trend and took in more inflation-adjusted tax revenue in the second quarter of 2023 than in the second quarter of 2022: Wyoming (23.8%), New Hampshire (11.2%), Delaware (4.4%), Louisiana (1.7%), and Wisconsin (1.6%). Collections in Wyoming benefited from a boost in severance tax revenue related to rising energy prices.

However, the second quarter also saw an increasing number of states underperforming their long-term trends. At the end of the third quarter of 2022, tax collections in all 50 states were performing above their 15-year trends, but the number performing below their trends grew rapidly after that—first to one at the end of 2022, then four by the end of the first quarter of 2023, and then 18 by the end of the second quarter of 2023. According to Pew’s estimates, California fell the furthest, collecting 16.2% less in tax revenue than its 15-year trend projected as of the end of the second quarter of 2023. Minnesota was second at 4.9% below trend. 

Looking back farther, tax revenue in many states has been in decline for more than a year. At the close of fiscal 2023, 39 states had collected less inflation-adjusted tax revenue than in the previous year—the most states with a decline since fiscal 2020, when the onset of the pandemic caused steep and widespread plunges in state tax collections. In total, state tax revenue fell 9.2%, or $145.1 billion, over the course of the 2023 budget year.

However, 11 states—Alaska, Delaware, Louisiana, New Mexico, North Dakota, Oregon, South Dakota, Tennessee, Texas, West Virginia, and Wyoming—bucked the national trend and collected more tax revenue in fiscal 2023 than the year before. Three of those—Alaska, New Mexico, and Wyoming—experienced double-digit growth by the end of the fiscal year as rising energy prices boosted collections from severance taxes, which are the largest or second-largest tax revenue sources in these energy-rich states. 

State highlights

A comparison of tax revenue in the second quarter of 2023 and each state’s 15-year trend levels, adjusted for inflation and seasonality, shows that:

• Tax revenue outperformed its long-term trend in 32 states. Alaska led all states by far—collecting more than 11 times (1,041%) its long-term trend level. The states with the next-highest collections compared with their long-term trends were Wyoming (37.7%), New Mexico (32.5%), West Virginia (10.6%), and Montana (10%).
• The states with the weakest tax revenue compared with their long-term trends were California (-16.2%), Minnesota (-4.9%), New York (-4.8%), Connecticut (-4%), and Nebraska (-3.4%). California’s underperformance is partially attributable to the recent delay in the income tax filing deadline for state residents, which pushed large sums of personal and corporate income tax payments from April to November.
• The number of states performing below their long-term revenue trends shifted dramatically, from four in the previous quarter to 18. The 15 new states were: Arkansas, Colorado, Connecticut, Hawaii, Iowa, Maryland, Massachusetts, Michigan, Nebraska, New York, Ohio, Rhode Island, Vermont, Virginia, and Washington. Revenue in California, Minnesota, and Wisconsin was already below trend, whereas New Hampshire climbed back above its long-term trajectory.

Trends by tax type

Approximately 75% of total state tax revenue comes via levies on personal income, general sales of goods and services, and corporate income. During the second quarter of 2023, general sales and corporate income taxes outperformed their 15-year trends while personal income taxes underperformed.

• Personal income tax collections were 12%, or $16.8 billion, below their 15-year trend as of the second quarter of 2023, after adjusting for inflation and seasonality. Of the 43 states that impose this tax type:
  • 26 had collections that underperformed long-term trends, ranging from 97.9% below trend in Tennessee and 31.7% below trend in California to less than 1% below trend in Pennsylvania (0.2%) and Maryland (0.8%). (Tennessee fully phased out its personal income tax as of Jan. 1, 2021.)
  • Personal income tax revenue outperformed its long-term trend by the greatest amount in New Mexico (13.4%).
• Corporate income tax collections were 25.6%, or $6.3 billion, higher than their 15-year trend as of the second quarter of 2023. Historically, corporate income taxes are more volatile than other major state taxes. Of the 46 states that impose this tax type:
  • 45 had collections that outperformed long-term trends, ranging from 584% in Alaska to 2.5% in Minnesota.
  • Indiana was the only state where corporate tax collections underperformed (3.3%) their long-term trend.
• General sales tax collections were 4.9%, or $5.3 billion, higher than their 15-year trend as of the second quarter of 2023. Of the 45 states that impose this tax type:
  • 40 had collections that outperformed long-term trends, ranging from 15.2% in New Mexico to less than 1% in Connecticut (0.9%) and Pennsylvania (0.2%).
  • General sales tax revenue underperformed its long-term trend in five states: Iowa (0.5% below trend), Louisiana (1.1%), Virginia (1.7%), Kansas (1.7%), and Ohio (2.2%).

Recent developments

Although the fiscal 2023 revenue slide is significant, it reflects, in large part, the enormity of the revenue surge in fiscal 2021-22 and should be interpreted with that context in mind. At its height, the difference between actual 50-state tax revenue and its long-term trend peaked in the second quarter of 2022 at 15%—greater than at any point in at least the past 15 years. Following the pandemic’s initial negative impact on annual revenue, state tax collections surged in budget years 2021 and 2022, posting the highest and second-highest annual growth rate increases of the past 25 years.

Monthly data from the Urban Institute shows that total inflation-adjusted receipts continued to weaken nationwide during the first half of fiscal 2024. From July 2023 through January 2024, state tax revenue totaled $705.5 billion—a 1.6% drop compared with the same period a year earlier. And much like the fiscal 2023 decline, the slide is a shared one, with 39 states running behind last year’s levels as of this writing.

But many states could still outperform their revenue forecasts. According to the National Association of State Budget Officers (NASBO), states’ fiscal 2024 budgets anticipate a nominal 1.8% annual decline in general fund revenue amid slowing economic growth and the waning temporary factors—including the indirect effects of federal aid to businesses and individuals, a shift in consumer spending patterns, and record-breaking stock market gains—that drove the fiscal 2021 and 2022 revenue surge. The recent weakening in revenue growth largely reflects the unwinding of these factors and a return to more normal conditions following that brief but extraordinary boom.

And with most states forecasting a revenue slowdown, whether the budgetary commitments that states adopted during the past three fiscal years in response to pandemic highs will remain affordable over the long-term is an open question. For instance, 31 states enacted net tax cuts in their fiscal 2023 budgets, up from 18 that did so in fiscal 2022, according to data from NASBO. These reductions range from targeted, temporary rebates to permanent, broad-based rate reductions. Additionally, lawmakers in 40 states approved across-the-board wage increases for state employees, ranging from 2% to 12% in fiscal 2024, an increase from the 37 states that raised state worker wages in fiscal 2023 and the 25 states that did so in fiscal 2022.

States can use two fiscal management tools to better evaluate whether they will be able to afford these commitments over the long term and to prepare for possible future fiscal challenges:

• Long-term budget assessments help policymakers identify challenges that can build over time.
• Budget stress tests help leaders assess how different economic scenarios would affect their budgets and how much to set aside in their rainy day funds.

Changes since the pandemic’s onset

The start of the COVID-19 pandemic in early 2020 abruptly ended a nearly continual stretch of annual growth since 2010 when state tax revenue began recovering from the Great Recession. Aggregate state tax revenue from April through June 2020 was an extraordinary 25% lower than in the same quarter of 2019—the steepest single-quarter plunge in at least 25 years.

But much of the sudden shortfall resulted from the federal government’s decision—copied by nearly all states—to delay that year’s income tax filing deadline until July 15, which pushed large sums of personal and corporate income tax payments into the first quarter of fiscal 2021 and aggravated the strain on many states’ fiscal 2020 budgets. In the face of tremendous uncertainty, states forecasted multiyear revenue declines comparable to or more severe than those experienced as a result of the 2007-09 recession. But as the pandemic progressed, national tax revenue rebounded swiftly by historical standards—recovering about five times faster than it did after the 2007-09 recession.

Tax collections continued to exceed expectations in budget years 2021 and 2022, posting the highest and second-highest annual growth rates of the past 25 years, respectively, and bringing state tax revenue to record highs, while historic rainy day fund balances and federal aid to state governments gave state budgets extra breathing room.

Of the various factors that contributed to these higher-than-expected collections, unprecedented federal aid to businesses and unemployed workers, a shift in consumer spending patterns from purchases of often-untaxed services to typically taxable goods, and widespread conservative revenue forecasts were the primary catalysts. States’ relatively recent authority to collect sales taxes from out-of-state online sellers, quicker-than-anticipated recoveries in the stock market and employment, and job stability in higher-wage professions that were able to pivot to remote work also played a significant role.

Natural resource-dependent states—such as Alaska, North Dakota, and Wyoming—and those reliant on tourism—such as Hawaii and Nevada—had some of the deepest and longest-running declines in tax revenue. Reduced travel in the early stages of the pandemic hurt businesses and jobs in the leisure and hospitality industries and lowered demand for fuel, further depressing tax revenue in energy states that were already coping with pre-pandemic declines in oil and gas prices. Starting in the second half of 2021, however, rising energy prices and increasing tourism have boosted these states’ recoveries.

Why Pew assesses state tax revenue trends

Tax revenue serves as the primary source of funding for most states. By tracking tax revenue trends, Pew provides policymakers and analysts with insights into the long-term financial health of their states, because revenue directly affects states' capacity to provide residents with core public services—such as education, healthcare, and infrastructure—and to fund other policy priorities.

Understanding long-term trends can also help state leaders judge whether their budgets are on a sustainable path and can support better-informed fiscal planning and policy formulation. Policymakers should assess the factors behind tax revenue deviations from long-term trends—overall and for particular revenue streams—to understand whether revenue variations stem from policy changes, external factors beyond their immediate control—such as demographic shifts—or both. And to help ensure their state’s long-term fiscal sustainability, lawmakers should also examine whether these deviations are the result of one-time or temporary factors or whether they represent a more structural change that is likely to persist without policy action.

Justin Theal is an officer and Alexandre Fall is a senior associate with The Pew Charitable Trusts’ Fiscal 50 project.