In fiscal year 2024, inflation-adjusted tax revenue fell in 40 states compared with the previous year’s collections, marking the first consecutive years of decline for most states since the 2007-09 Great Recession. Consequently, tax revenue now trails its 15-year growth trends in 38 states.
Despite the widespread downward trajectories, state tax revenue is showing signs of stabilization. Most states saw more moderate annual declines than they did in fiscal 2023, reflecting a return to growth rates more aligned with historical norms after four years of extreme fluctuations. Unlike past revenue declines tied to recessions, this contraction is driven mainly by waning temporary pandemic-related factors and the adoption of widespread tax cuts.
Most states had anticipated the current slowdown in their fiscal 2023 and 2024 budgets, which helped them maintain their relatively strong fiscal positions. However, the number of states underperforming their long-term trends has steadily risen over the past two years: Just one state had tax revenue below its 15-year trend at the end of 2022, but the number of such states has grown rapidly, rising to 17 by mid-2023, then 28 by the end of 2023, and 38 in the second quarter of 2024.
The two-year trend underscores a growing fiscal challenge. As the nation moves beyond the historic revenue growth of 2021 to 2022, policymakers will have less new funding available for policy priorities such as tax cuts, increased public services, and recession preparedness.
Nationally, total tax revenue was 2.8% below its 15-year trend during the second quarter of 2024, after adjusting for inflation and smoothing for seasonal fluctuations. Just two years earlier, actual tax revenue collections were 15% above trend—greater than at any point since at least the Great Recession.
Although state tax revenue fell short of its long-term trend in the four quarters ending June 30, 2024, collections still rose $16.4 billion, or 1.1%, by the end fiscal 2024. However, this increase was largely driven by California, which saw a $40.9 billion surge in revenue because of a temporary shift in its income tax-filing deadline. Excluding California, collective state tax revenue fell 2% year over year.
Fiscal year declines ranged from -46.5% in Alaska and -22.7% in Oregon to less than half a percent in Maryland (-0.1%), Wisconsin (-0.3%), and Alabama (-0.5%). Alaska’s drop was driven by falling energy prices, which weakened severance tax collections—the state’s largest tax revenue source. Oregon’s decline, meanwhile, was largely tied to the largest-ever payout of the state’s kicker rebate—a mechanism that refunds surplus revenue to taxpayers when actual revenue exceeds projections by a certain threshold.
Only 10 states had tax revenue increases in fiscal 2024: California (17.8%), Nebraska (7.8%), South Carolina (6.8%), Rhode Island (4.4%), Virginia (2.2%), Nevada (2.1%), New York (1.8%), Massachusetts (1.2%), Hawaii (1.1%), and Vermont (0.4%). Except for Nevada, all of these states bounced back from revenue declines in fiscal 2023.
A comparison of tax revenue in the second quarter of 2024 versus each state’s 15-year trend levels, adjusted for inflation and seasonality, shows that:
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 2024, corporate income taxes outperformed their 15-year growth trends, while general sale taxes held steady and personal income taxes fell short.
After peaking in mid-2022, state tax collections have been declining, largely because of the end of the pandemic-era revenue wave and the widespread adoption of tax cuts.
In the second quarter of 2024, 33 states reported lower year-over-year inflation-adjusted tax revenue, with decreases ranging from 33.3% in Oregon and 28.5% in Nebraska to less than half a percent in Wisconsin (-0.2%) and Nevada (-0.3%). Yet, even with pervasive declines, in the final quarter of the fiscal year, states experienced less widespread and less severe drops than the same period a year earlier, which suggests that conditions may be stabilizing.
Furthermore, many states outperformed their revenue forecasts in fiscal 2024. According to the National Association of State Budget Officers (NASBO), 39 states reported being on track to collect more revenue during fiscal 2024 than they initially projected. States’ fiscal 2024 budgets anticipated a nominal 1.8% annual decline in general fund revenue amid slowing economic growth and waning of temporary factors that drove the fiscal 2021 and 2022 revenue surge, primarily the indirect effects of federal aid to businesses and individuals, a shift in consumer spending patterns, and record-breaking stock market gains.
Looking beyond fiscal 2024, data from the Urban Institute shows that total inflation-adjusted tax revenue continues to improve. Nearly half of states (24) reported increased collections during the first three months of fiscal 2025 compared with the same period a year earlier, in line with states’ overall projections of a slight revenue uptick of 1.6% for fiscal 2025.
Still, after two years of historic growth followed by two years of declines, this stabilization may not necessarily signal improved budget conditions. Although actual collections may be less volatile and align more closely with projections, states will still have fewer resources than they did during the pandemic years even as spending demands continue to grow, meaning budget deficits may become more common.
One question is whether states will be able to afford the budgetary commitments they made in the past four years—such as tax relief and pay raises for public employees—over the long term. For instance, fiscal 2023 and 2024 saw the largest net state tax cuts ever recorded (by dollar amount), according to 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 in fiscal 2024, ranging from 2% to 12%, 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 and other commitments over the long term and to prepare for possible future fiscal challenges:
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 25.3% 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.
The years of momentous tax revenue growth came to an end in fiscal 2023, when inflation-adjusted tax revenue fell compared with the prior year—the only time in at least 40 years that real annual tax revenue has declined outside of a recession.
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 a senior officer and Alexandre Fall is a senior associate with The Pew Charitable Trusts’ Fiscal 50 project.