State Tax Revenue Declines From Record Highs

In nearly three-quarters of the states—the most since the start of the COVID-19 pandemic—tax revenue outperformed its pre-COVID growth trend as of the end of the first quarter of 2023 when all receipts since January 2020 are combined. Nationally however, inflation-adjusted collections appear to have peaked in 2022 and are now on a downward trend after posting three quarters of consecutive declines for the first time since the Great Recession of 2007-09.

In the first quarter of 2023, total state tax revenue fell for the third quarter in a row on a year-over-year basis, but it remained higher than before the pandemic-driven downturn in early 2020. Collections were 15.6% greater than those for the final quarter of 2019, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations.  Tax collections were above pre-pandemic levels in every state. 

As of the end of the first quarter of 2023, nationwide and in 37 states, cumulative tax receipts since the pandemic’s start, adjusted for inflation, were even higher than they would have been if pre-COVID growth trends had continued—despite fallout from the pandemic and a two-month recession. According to Pew estimates, New Mexico led all states, with 29.1% more cumulative tax revenue than it would have collected under its pre-pandemic growth rate. Alaska was second at 22.2% above the trend. Nationally, combined tax revenue at the end of the first quarter of 2023 was 3.6% above estimates of what might have been collected had the pandemic not occurred.

Looking at cumulative totals since the start of the pandemic offers a way to identify states in which tax revenue has over- or underperformed since January 2020, based on pre-COVID trends. This approach also provides a different view of the strength of collections from the often-astonishing quarterly and annual percentage changes that were skewed by this particularly volatile period. For each of the 13 quarters from Jan. 1, 2020, to March 31, 2023, Pew calculated the difference between actual tax revenue and estimates of how much each state would have collected had revenue grown at its pre-pandemic, five-year average annual growth rate.

Download the data, including state-by-state trends.

Despite relatively high collections, receipts are on a downward trend nationwide and in most states. Monthly data from the Urban Institute shows that total inflation-adjusted receipts fell in all but one month from July 2022 to June 2023, signaling that state tax revenue has passed an inflection point. Moreover, after two years of historic and widespread growth, initial estimates indicate that most states closed their 2023 budgets with inflation-adjusted annual declines.

But many states still outperformed their revenue forecasts. According to the National Association of State Budget Officers, 45 states collected more than their original revenue forecasts. States enacted their fiscal 2023 budgets anticipating a 3.1% annual decline in general fund revenue amid weakening economic conditions and waning temporary factors, particularly federal pandemic aid, that had bolstered recent growth. Many states then revised their forecasts upward mid-year in response to greater-than-expected strength in the labor market and consumer spending.

Although abundant federal aid and record financial reserves have improved budget conditions recently, states must navigate several looming challenges, including weakening tax revenue as economic growth slows and monetary policy tightens, still-elevated inflation, and a tapering of federal pandemic aid. The simultaneous weakening of tax revenue growth and decline of temporary federal aid may prove especially challenging, because such trends do not typically occur at the same time throughout business cycles.

During the past two fiscal years, states have pursued a blend of short- and long-term budgetary commitments—such as tax cuts and pay raises for public workers—in response to higher-than-expected revenue and related budget surpluses. For instance, 31 states enacted net tax cuts in their fiscal 2023 budgets, up from 18 that did so in fiscal 2022. These reductions have ranged from targeted, temporary rebates to permanent, broad-based rate reductions. Additionally, lawmakers in 37 states approved across-the-board wage increases for state employees ranging from 1% to 10% in fiscal 2023, an increase over the 25 states that raised state worker wages in fiscal 2022.

To better understand whether they can afford these commitments and to prepare for possible future fiscal challenges, states can use two fiscal management tools: long-term budget assessments, which help policymakers identify challenges that can build over time, and budget stress tests, which help leaders assess how different economic scenarios would affect their budgets and how much to set aside in their rainy day funds.

State highlights

A comparison of inflation-adjusted tax revenue between Jan. 1, 2020, and March 31, 2023—with estimates for the same period if collections had grown at their pre-pandemic five-year average annual growth rate—shows that:

• New Mexico tax revenue outperformed that of all states—posting 29.1% more in collections than it would have raised had revenue continued at the state’s five-year pre-pandemic growth trend.
• The states with the next-strongest tax revenue gains compared with their pre-COVID growth trends were Alaska (22.2%), Idaho (16.9%), New York (13.1%), Utah, Montana, and Illinois (11.1% each).
• Revenue in every state met or exceeded 2019 levels just before the pandemic. But in 13 states, cumulative collections still remained below pre-COVID growth trends: Hawaii, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada, New Hampshire, Oklahoma, Oregon, Washington, and Wisconsin.

Recent trends

Tax revenue declined collectively and in most states in the first quarter of 2023, a stark break from the unexpectedly high gains that characterized state tax trends during the pandemic. Overall, after adjusting for inflation, collections during the first quarter of 2023 fell by 11.5% compared with the same period in 2021, accelerating negative growth in the third and fourth quarters of 2022.

Thirty-seven states reported lower year-over-year inflation-adjusted tax revenue in the first quarter of 2023, ranging from -36.3% in California, -15.6% in New York, and -15.4% in South Carolina to less than 1% in Indiana, New Hampshire, Ohio, Oklahoma, and Pennsylvania. Declines in New York and California, which accounted for more than three-quarters of the total declines nationally, were driven in large part by stock market volatility that led to a reduction in 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 tech-industry initial public offerings reduced collections in California.

Thirteen states took in more inflation-adjusted revenue in the first quarter of 2023 than in the first quarter of 2022, ranging from 27.9% in Wyoming and 15% in New Mexico to less than 1% in Alaska, Mississippi, Nevada, and South Dakota. Collections in Wyoming and New Mexico benefited from boosts in severance tax revenue related to the rise in energy prices. Severance taxes are both states’ second-largest tax revenue sources.

High inflation rates have played an outsized role in revenue trends since mid-2021. For example, 37 states experienced year-over-year gains during the first quarter of 2023 when the rising costs of goods and services are not taken into consideration. But when receipts are adjusted for increasing prices, the number of states that had gains falls to 13—reflecting that states can collect more money but still face declining purchasing power.

Nationally, state revenue weakened substantially across most major tax streams. Personal income taxes, which are the largest source of total state tax revenue, fell by an inflation-adjusted 22.5% in the first quarter of 2023. Although strong employment growth and rising wages helped bolster national collections, along with still-elevated short-term government aid to individuals, stock market volatility, recent tax cuts, and other tax policy changes fueled the overall declines in personal income tax collections. Sales taxes, which are states’ second-largest tax revenue source, posted an inflation-adjusted quarterly increase of 0.7%, which is roughly seven times slower than the average rate since the pandemic’s start. The slowdown in sales tax collections is largely a result of slowing consumer spending and the unwinding of a temporary, pandemic-driven shift in expenditure patterns from purchases of often-untaxed services to typically taxable goods.

Trends since the pandemic’s onset

The start of the COVID-19 pandemic abruptly ended a nearly continual stretch of annual growth since state tax revenue began recovering from the recession of 2007-09.

No major tax stream was left unscathed after the economy plunged into a new recession in February 2020 amid a historic spike in unemployment to nearly 15%, a short-lived stock market crash, business closures, and restrictions on public gatherings.

Aggregate state tax revenue from April through June 2020 was an extraordinary 25% lower than the same quarter of 2019—its 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 the 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 about the course and severity of the coronavirus, its effects on state tax revenue, and the availability of federal aid, states forecasted multiyear revenue declines on par with or worse than what they had experienced due to the Great Recession. However, tax revenue nationally rebounded swiftly by both historical standards—approximately five times faster than the recovery after the Great Recession—and compared with what many states and economic experts had initially projected.

Following an initial return to pre-COVID levels, tax collections continued to exceed expectations in budget years 2021 and 2022, posting the highest and second-highest annual growth rates in the past 25 years, respectively. These back-to-back years of historic growth brought state tax revenue to record highs. In addition, record rainy day fund balances and historic federal aid to state governments gave state budgets extra breathing room.

Various factors drove these higher-than-expected collections, including unprecedented federal aid that helped support businesses and unemployed workers, a shift in consumer spending patterns from purchases of often-untaxed services to typically taxable goods, 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.

To be sure, the pandemic’s sudden and widespread disruptions in early 2020 triggered a sharper decline in total state tax revenue than was recorded during at least the last two recessions, but total losses were not as deep. And the national data obscures another hallmark of the 2020 recession: sharply divergent effects on state tax revenue. The size and speed of states’ revenue declines and rebounds varied widely, influenced by each state’s economic makeup, share of jobs that could be performed remotely, mix and structure of imposed taxes, COVID-19 caseloads, and public health restrictions.

Early in the pandemic, 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 COVID-19 pandemic hurt businesses and jobs in the leisure and hospitality industry and lowered demand for fuel, further depressing tax revenue in energy states 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.

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).

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.

Analysis by Justin Theal and Alexandre Fall.