Data Visualization

Tax Revenue Volatility

Fiscal 50

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The tax revenue volatility indicator measures how much the annual state tax revenue growth rate has varied in recent years compared with long-term volatility trends. Understanding revenue volatility patterns can help policymakers assess their relative budgetary risks and implement evidence-based savings strategies that harness tax growth during prosperous years to cushion against lean periods.

Updated: May 7, 2024

Tax Revenue Volatility Is Increasing in Most States

Tax revenue in the majority of states and nationwide has become more volatile in recent years compared with long-term trends. During the five years ending in fiscal year 2022, federal tax policy changes and multiple pandemic-era factors fueled historic annual increases in collections. Unforeseen swings in tax revenue even during times of relative economic certainty present fiscal challenges to policymakers, with some states more prone to volatility than others.

In this analysis, The Pew Charitable Trusts calculates a short-term and long-term volatility score for overall state tax revenue and for major tax revenue streams (at least 5% of tax revenue on average over the last decade) for each state. The analysis removes the estimated effect of state tax policy changes to focus on the underlying volatility of revenue that is often influenced by factors outside of policymakers’ control. Examining the shift in volatility between the latest period and the longer-term trend can help policymakers identify the extent to which recent tax revenue fluctuations have deviated from historical norms. Policymakers should assess the factors contributing to these deviations—overall and for particular revenue streams—and examine whether they are temporary or likely to last into the foreseeable future without policy action.

Pew’s volatility scores measure the variation in year-over-year percentage changes over the five- and 15-year periods ending in fiscal 2022, based on a calculation of standard deviation. A low score means that revenue growth rates were similar from year to year, and a high score indicates that growth rates varied more dramatically.

Overall, state tax revenue had a volatility score of 7.1 for the 15 years ending in fiscal 2022—ranging from 3.9 in Iowa to 51.6 in Alaska. The results mean that, from fiscal 2008 to 2022, the growth rate of total tax revenue across the states typically fluctuated 7.1 percentage points above or below its average. For the five years ending in fiscal 2022, the volatility score increased to 8.4—nearly one-fifth higher than the long-term trend.

While states can influence the year-to-year growth rates of revenue through policy changes, the underlying volatility of each tax stream is often shaped by a variety of other factors beyond policymakers’ control. These include economic factors—such as the mix of industry, natural resources, workforce, and population growth—as well as changes to federal budget and tax policy and unforeseen events, such as natural disasters.

Since the pandemic’s onset, inflation-adjusted state tax revenue declined by 2.3% in fiscal 2020, then spiked by 19.4% in fiscal 2021—the steepest annual growth in at least 70 years—and again by 14.5% in fiscal 2022, in large part because of a mix of one-time and temporary factors. In particular, a delay in the 2020 income tax filing deadline—which was extended to July 15 instead of the standard April 15 date—pushed large sums of income tax collections into the first quarter of fiscal 2021, inflating annual gains in roughly half of states. Two other major, temporary factors contributed to these pandemic-era highs: unprecedented amounts of federal COVID-19 aid to individuals and businesses, plus a pandemic-driven shift in personal spending habits from often-untaxed services to purchases of goods, which are taxable in most states. A mix of underlying economic conditions during this period also helped to drive up individual tax streams—including historically high inflation rates, low unemployment, a spike in wage growth, robust consumer spending, and rising corporate profits—as well as strong stock market returns in 2021.

Implementation of the federal Tax Cuts and Jobs Act (TCJA) contributed to a historic increase in the underlying volatility of many state tax streams beginning in late 2017, when collections experienced their largest annual swing since the Great Recession of 2007-09 as states and taxpayers began adjusting to their new liabilities. Because of the way in which state and federal tax codes are linked, the TCJA’s federal tax code changes automatically led to higher state tax bills for some residents and businesses unless states enacted legislation to counteract them.

State highlights

During the 15 years ending in fiscal 2022:

  • States with the highest volatility were Alaska (51.6), North Dakota (21.2), and Wyoming (14.5)—all natural resource-dependent economies that rely heavily on severance tax revenue.
  • The lowest-ranked states for volatility were Iowa (3.9), Arkansas (4.0), and Maryland (4.3). Each of these states typically relies on relatively stable tax streams for over half of its revenue—general sales and personal income in Iowa and Maryland, and property taxes, general sales, and personal income for Arkansas.

During the five years ending in fiscal 2022:

  • The highest volatility occurred in Alaska (62.3), North Dakota (21.4), and Utah (20.8). Historic fluctuations in oil prices during this time spurred large annual changes in Alaska’s and North Dakota’s severance tax revenue, which both states rely on heavily. Utah’s personal income tax revenue, which accounts for the greatest share of its overall collections, fluctuated more than any other state’s during this time. Additionally, the state’s corporate income taxes, its third-greatest tax source, fluctuated the fourth most among states.
  • States with the lowest revenue volatility were Washington (3.7), Virginia (3.9), and Iowa (4.3). These states rely on relatively stable tax streams for over half of their revenue—general sales for Washington, personal income for Virginia, and a combination of general sales and personal income for Iowa. Their gains in 2021 and 2022 were also less dramatic than the national trend—contributing to lower growth rate volatility compared with most states.

A comparison of state tax revenue volatility scores between the latest five-year period and the longer 15-year trend shows that:

  • Forty-one states experienced higher volatility in recent years compared with their long-term trends, ranging from a 59.9% jump in Oregon to less than 1% higher in Louisiana and North Dakota. Oregon’s surge in volatility is largely attributable to the state’s heavy reliance on its personal income tax, which has a highly progressive structure. Additionally, there were above-average fluctuations in these collections over the five-year period.
  • The nine states that bucked the national trend and recorded less volatility in recent years than their long-term trends were Oklahoma (-0.4%), Wisconsin (-2.6%), Idaho (-4.0%), Alabama (-4.4%), Tennessee (-6.0%), South Carolina (-7.5%), Delaware (-16.1%), Washington (-29.1%), and Virginia (-39.1%). In Virginia, reduced personal income tax volatility played a major role, while Washington’s shift was driven by less sales tax volatility. Delaware saw a reduction in corporate license tax volatility between the five- and 15-year periods.

Volatility by tax source

Over the last decade, approximately 80% of total state tax revenue was derived from levies on personal income, general sales of goods and services, and corporate income. Each of these major tax revenue sources exhibited higher volatility scores in the latest five years compared with their long-term trends.

  • Personal income taxes accounted for a major share of total tax revenue over the last decade in 41 of the 43 states that impose them. Among these states, personal income taxes had a volatility score of 9.9 for the 15 years ending in fiscal 2022, ranging from 22.6 in Utah to 6.0 in Wisconsin. Notably, the volatility score for total personal income tax revenue surged to 13.2 in the most recent five years, a one-third increase compared with the long-term trend.
  • General sales taxes represented a significant portion of total tax revenue over the last decade in all 45 states that levy them. For the 15 years ending in fiscal 2022, general sales taxes had a volatility score of 5.1, ranging from 17.5 in North Dakota and Wyoming to 3.3 in Maryland. The collective volatility score for general sales tax revenue ticked up to 5.2 in the most recent five years.
  • Corporate income taxes accounted for a major share of total tax revenue over the last decade in 27 of the 46 states that impose them. Among these states, corporate income taxes had a volatility score of 22.5 for the 15 years ending in fiscal 2022, ranging from 77.5 in Alaska to 11.8 in New Hampshire. In the most recent five years, the volatility score for corporate income tax revenue surged to 29.9—a one-third increase compared with the long-term trend.
  • Severance taxes, which are highly dependent on global energy prices, stand out as another important revenue source for several states. Over the last decade, severance taxes were the most volatile revenue source in seven of the nine states where they accounted for enough revenue to be considered a major tax source. Collectively, severance taxes registered a volatility score of 34.6 for the 15 years ending in fiscal 2022, ranging from 89.7 in Alaska to 24.3 in Louisiana. Notably, the volatility score for severance tax revenue increased to 44.3 in the most recent five years, a 27.9% increase compared with the long-term trend.

Drivers of overall volatility

In general, two factors work in tandem to influence a state’s overall revenue volatility: how dramatically each tax stream changes from year to year and how heavily a state relies on each revenue source. Smaller tax streams can be highly volatile. But the more minor the tax source, the less of an impact it has on a state’s overall revenue volatility.

For example, the three states with the highest overall scores—energy-rich Alaska, North Dakota, and Wyoming—collected the largest or second-largest shares of their tax dollars over the last 10 years from highly volatile severance taxes. Yet Texas, the largest oil producer in the nation, ranked in the middle of states for overall revenue volatility, even though its severance tax revenue was the third most volatile. The crucial difference is that severance tax accounted for 8.4% of Texas’ total tax collections over the last decade, compared with 53.4% of tax revenue in Alaska, 48.2% in North Dakota, and 31.5% in Wyoming.

Similarly, in the 27 states where corporate income tax was a major source of tax revenue, it was the most volatile major source in all but two: Florida and New Hampshire. However, its average share of total tax revenue was under 10% in all but three of these states: Alaska, New Hampshire, and Tennessee.

Why Pew assesses state tax revenue volatility

Policymakers face challenges when tax dollars experience unforeseen swings—and some states tend to experience far more dramatic swings than others. While these fluctuations add complexity to the already demanding tasks of revenue forecasting and budgeting, they are not inherently bad. States often use unexpected upswings in revenue to reduce debt, engage in one-time investments like infrastructure projects, or bolster reserves. However, it is essential that states whose revenue structures are particularly susceptible to volatility are also prepared for sudden revenue declines.

Understanding state-specific revenue volatility is a first step for policymakers to implement evidence-based savings strategies. These strategies leverage revenue growth during prosperous years to cushion against lean periods. Examples include directing one-time or above-average revenue into a rainy day fund and earmarking these funds for narrowly defined purposes. States can also mitigate fiscal uncertainty by limiting spending from highly volatile tax streams and allocating revenue from these sources to intergenerational savings accounts such as sovereign wealth funds, a practice adopted by several resource-rich states. These policies, coupled with other fiscal management tools, can help stabilize budgets and assist policymakers in long-term planning.

Mark Robyn is a senior officer and Gayathri Venu is an associate with The Pew Charitable Trusts’ state fiscal health project, and Justin Theal is an officer with Pew’s Fiscal 50 project.


Notes, Sources & Methodology

The Pew Charitable Trusts’ fiscal 50 project has recently refined its methodology for assessing state tax revenue volatility, transitioning from a 20-year analysis to a more nuanced approach. The updated methodology assesses volatility in state tax revenue over two distinct periods: the latest five-year span (representing the short term) and the latest 15-year time frame (capturing long-term trends). This adjustment aims to provide policymakers with additional insights into state tax revenue fluctuations, particularly in identifying instances where short-term trends have deviated from historical norms.

Four data points for yearly percentage change in major tax sources were removed as outliers. Additionally, a small number of data errors were discovered in the U.S. census data. These data points were removed from Pew’s analysis and are pending review by the U.S. Census Bureau. In the presentation of annual percentage changes in Figure 3, the trend line transitions to a dashed line when there are missing values. For Nevada, the trend line for “Other tax” reflects the census’ “Taxes, NEC” category (census code T99), which includes the state’s modified business tax and starts in 2005, when the state began collecting the tax.

While Pew’s analysis rigorously controls for state tax policy changes enacted through legislative processes or approved by voters, it is important to acknowledge certain limitations stemming from data constraints. Notably, the analysis may not comprehensively account for state executive actions, such as the widespread shift of the 2020 income tax filing deadline from April to July, because of data limitations. The impacts on annual collections resulting from these administrative actions can be meaningful within many states. For example, the income tax filing deadline shift reallocated large sums of personal and corporate income tax payments from fiscal 2020 to fiscal 2021, artificially inflating annual declines in fiscal 2020 and subsequent growth in fiscal 2021. Additionally, administrative tax actions typically lack public estimates of their costs, a feature commonly produced for legislative actions. This absence makes isolating and quantifying the specific effects of administrative actions challenging within the broader context of states’ overall annual tax trends.

The recessions depicted in Figure 3 spanned from January 2008 to June 2009 and March to April 2020. The shading indicating these recessions is based on a state fiscal year running from July to June and so is slightly off for the four states with different fiscal years: New York (ends March 31), Texas (Aug. 31), and Alabama and Michigan (both Sept. 30). Additionally, because each annual data point represents the end—not the beginning—of the fiscal year, the shading appears at the left of the annual data point to show when during each fiscal year the U.S. economy was in recession. For more details on recession timing, see the business cycle dating from the National Bureau of Economic Research.

Sources & Methodology

Pew’s calculation of volatility scores is based on data from the U.S. Census Bureau’s annual survey of state government tax collections , accessed Sept. 7, 2023, and the National Conference of State Legislatures’ (NCSL’s) “State Tax Actions” reports from 2007 to 2022.

This analysis assessed the volatility of total tax collections and of major tax sources within each state over two distinct periods: the latest five-year span (representing the short term) and the latest 15-year time frame (capturing long-term trends).

Adjusting for tax policy changes

Much of the change in tax collections from year to year is the result of shifts in the economy or taxpayer behavior. But changes in state tax policy, such as tax rates or what gets taxed, can cause significant variation as well. To control for these effects and to isolate cyclical volatility in these tax sources, Pew reviewed and incorporated estimates from each NCSL “State Tax Actions” report from 2007 through 2022 to adjust U.S. Census Bureau tax revenue data.

The NCSL reports are based on information provided by legislative fiscal offices, which detail tax and revenue changes and quantify the expected fiscal impact by tax type. For each year and tax type, Pew calculated the estimated impact of tax policy changes as a percentage of previous-year revenue and then removed these estimated increases or decreases from the calculation of year-to-year percentage change. For example, if a sales tax cut was expected to result in a 5% drop in collections but receipts dropped by 3%, Pew’s analysis would consider that a 2% increase.

Calculating volatility

After removing the effect of known policy changes, Pew calculated the standard deviation of yearly percentage change as a measure of volatility. Standard deviation describes the average level of variation from a mean for each state’s overall tax collections and major tax streams. In the context of this report, a low value means that revenue growth rates were more similar from year to year, and a high value indicates that growth rates varied more dramatically.

Overall volatility score

Each state’s overall volatility scores were based on the standard deviation of yearly percentage change in total tax revenue from fiscal years 2008 to 2022 for the 15-year period and fiscal 2018 to 2022 for the five-year period, less the effect of total tax policy changes. The 50-state overall volatility score was based on the standard deviation of year-to-year change in total tax revenue aggregated from all states. All volatility scores are expressed in percentage points.

Major tax volatility score

Major tax sources were defined as those collected in the last year of data—fiscal 2022—that made up at least 5% of total tax revenue on average over the last decade before adjusting for policy changes. This process identified two to six major taxes per state, for a total of 175 results across the 50 states in 15 tax categories. For each state, Pew determined the year-over-year change in each of its major tax types, less the impact of tax policy changes, and then calculated the standard deviation for each tax.

Removal of outliers

One or two extreme data points can have an outsized impact on the volatility score. It was therefore important to identify and examine large outliers in the policy-adjusted data before calculating the scores. Pew identified extreme outliers in both total revenue and each tax stream by looking at the median absolute deviation from the median percentage change of each tax source and then removing cases that exceeded 12 times that value. Of approximately 3,500 total data points, this process identified no outlier values for total revenue and 15 values for major tax sources.

We then examined each of these 15 data points for evidence that they were erroneous or could have been substantially affected by significant tax policy changes that that were not accounted for in the NCSL reports. If we did not find sufficient evidence, the data point was presumed correct and was retained in our analysis. In four of the 15 outlier cases, we found evidence to warrant excluding the data point from our analysis.

When investigating outliers, we examined patterns in the census data for the years before and after the outlier for evidence of a data error or unaccounted-for policy change. In some cases, we also searched for supplemental data from state government sources and investigated possible economic causes for the outlier, such as recessions. To look for evidence of unaccounted-for tax policy changes that could be causing the outlier, we checked the NCSL reports for significant tax changes that lacked a reported dollar value or were potentially attributed to the wrong tax stream or fiscal year. In some cases, we performed internet searches for evidence of significant tax changes that may have occurred but were not reported in the NCSL data.

Tax stream’s share of total tax revenue

Pew calculated each major tax stream’s share of total tax revenue by taking the average of the annual shares over the last decade. A tax is considered a major source of revenue if the average 10-year share is greater than 5% of total state tax revenue. A catch-all census category called “Other selective sales and gross receipts taxes,” which includes collections from lodging, meals, and soft drinks, among other items, was excluded from the analysis (despite reaching the 5% threshold) because of vast differences in the makeup of this tax stream across the states.

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