States experienced vastly different fluctuations in tax revenue over the past two decades, with the greatest year-to-year volatility occurring in Alaska and the least in South Dakota. These swings can confound efforts to balance state budgets. This analysis removes the ups or downs caused by tax policy changes to reveal the underlying volatility of each state’s total tax revenue and major tax sources.
A state’s overall revenue volatility springs from its unique mix of taxes. Between fiscal years 1995 and 2014, corporate income taxes and severance taxes on oil and minerals were consistently more volatile than other major state taxes, such as those on personal income and sales of goods and services.
By altering tax policy, state officials can increase or decrease tax revenue each year. But swings in revenue also are influenced by factors outside policymakers’ control, such as the state’s natural resources, workforce, population growth, and mix of industry; federal budget changes; and unforeseen events, such as natural disasters. Removing the estimated effect of policy changes from the calculation of each state’s volatility reveals the underlying revenue trends and provides useful information for policymakers trying to plan for and manage revenue uncertainty in state budgets.
After controlling for changes to state tax laws, this analysis derives a volatility score for each state’s overall tax revenue and each of its major taxes—those that made up at least 5 percent of its tax revenue on average over the past 10 years. The score measures variation in the year-over-year percent change between fiscal 1995 and 2014, based on a calculation of standard deviation. A low score means that revenue was similar from year to year, and a high one indicates that it grew or shrank more dramatically.
Alaska had the highest score—34.1—meaning the state’s total tax revenue showed wide variability from year to year, typically fluctuating within 34.1 percentage points above or below its overall growth trend. The next most volatile tax revenue streams were in Wyoming (11.9) and in North Dakota and Vermont (both 11.4).
The states with the lowest volatility were South Dakota (2.6) and Kentucky (2.8). The majority of states had volatility scores clustered within a range of 3 to 7 percentage points.
The addition of data for fiscal 2014 slightly reduced the scores for 43 states and for 50-state tax revenue, compared with scores based on the period from fiscal 1995 to 2013, suggesting that fiscal 2014 was a less volatile year for tax revenue than average. Rankings were unchanged for 30 states, including the nine states with the highest volatility scores and the three states with the lowest scores.
An analysis of each state’s tax revenue fluctuations from fiscal 1995 to 2014 reveals that:
Although most types of taxes tracked broader economic trends, some followed their own paths. As financial markets foundered and unemployment surged during the Great Recession, West Virginia benefited from high coal and natural gas prices and an increase in coal exports. In 2010, its severance collections increased by 42.7 percent, helping to offset declines in personal and corporate income tax revenue. As a result, West Virginia was one of the few states that did not tap its emergency reserves during the recession, according to Pew's report Managing Uncertainty: How State Budgeting Can Smooth Revenue Volatility.
State tax collections have become more volatile over the past decade, according to a 2014 study by the Nelson A. Rockefeller Institute of Government. Added volatility complicates the already difficult tasks of revenue forecasting and budgeting, yet it is not inherently bad. When receipts are higher than anticipated, states can improve roads and bridges, pay down debt, or build up reserves. But periods of unexpectedly high revenue may just as easily be followed by years of unanticipated low revenue that prompt service cuts or tax increases to make ends meet. By studying volatility, policymakers can put in place evidence-based savings strategies that harness tax growth in good years to cushion the lean years.
Download the data to see individual state trends. 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.