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: March 27, 2025
State Tax Revenue Is Becoming More Volatile
State tax revenue volatility has increased in recent years, with significant fluctuations not only in total collections but also across major tax streams. From fiscal year 2019 to fiscal 2023, annual tax revenue growth varied more dramatically than the long-term average, driven by a mix of COVID-19 pandemic-related disruptions, federal tax policy changes, and shifting economic conditions. Although states that rely on highly volatile tax streams experienced the sharpest increases in revenue volatility during this time, even those with traditionally stable tax sources faced greater-than-usual fluctuations. And unforeseen revenue shifts, whether small or large, can create budgeting challenges for policymakers.
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 2023, based on a calculation of standard deviation. A low score means that revenue growth rates were largely consistent throughout the analysis period, and a high score indicates that growth rates varied more dramatically.
Overall, state tax revenue had a volatility score of 7.4 for the 15 years ending in fiscal 2023—ranging from 4.0 in Arkansas to 56.2 in Alaska. The results mean that, from fiscal 2009 to 2023, the growth rate of total tax revenue across the states typically fluctuated 7.4 percentage points above or below its average. For the five years ending in fiscal 2023, the volatility score increased to 10.3—nearly 40% higher than the long-term trend.
Although 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, states have experienced significant swings in tax revenue. After declining by 4.3% in fiscal 2020, revenue surged by 23.2% the following year and again by 15.4% in fiscal 2022. However, in fiscal 2023, revenue fell by 4.2%. This volatility largely stemmed from a mix of one-time and temporary factors. These included a delay in the 2020 federal income tax filing deadline—from the standard April 15 to July 15—which pushed large sums of income tax collections into the first quarter of fiscal 2021, inflating annual gains in roughly half of states; unprecedented amounts of federal COVID-19 aid to individuals and businesses; and a shift in personal spending habits from often-untaxed services to purchases of goods, which are taxable in most states. Underlying economic conditions during the pandemic era—in particular, historically high inflation rates, low unemployment, a spike in wage growth, robust consumer spending, rising corporate profits, and strong stock market returns in 2021—also helped to drive up individual tax streams. The fiscal 2023 decline reflects the unwinding of many of these temporary factors.
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. Many TCJA provisions are set to expire at the end of this year, and as Congress takes up tax reform again, any federal policy changes could affect state tax revenue.
State highlights
During the 15 years ending in fiscal 2023:
- States with the highest volatility score were Alaska (56.2), North Dakota (20.3), New Mexico (19.9), and Wyoming (16.7)—all natural resource-dependent economies that rely heavily on severance tax revenue.
- The lowest-ranked states for volatility were Arkansas (4), Iowa (4.1), and Maryland and South Dakota (both 4.3). These states typically rely on relatively stable tax streams for more than half of their revenue: property taxes, general sales, and personal income for Arkansas, general sales and personal income in Iowa and Maryland, and general sales in South Dakota.
During the five years ending in fiscal 2023:
- The highest volatility occurred in Alaska (83.7), New Mexico (27.6), and California (24.7). Sharp annual changes in severance tax revenue, driven by historic fluctuations in oil prices, were a key factor in Alaska and New Mexico, reflecting these states’ heavy reliance on this revenue source. Additionally, in New Mexico and California, personal income tax revenue—a major share of overall collections for both states—fluctuated by the highest and second-highest amount during the same period.
- States with the lowest revenue volatility were Washington (3.8), Virginia (4.5), and Kentucky (4.7). 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 Kentucky.
A comparison of state tax revenue volatility scores between the latest five-year period and the longer 15-year trend shows that:
- Forty-four states experienced higher volatility in recent years compared with their long-term trends, ranging from a 70% jump in Nevada to a modest 1.3% rise in Indiana. Nevada's sharp increase in overall volatility stems largely from fluctuations in sales tax collections and a spike in amusement tax revenue over the last five years. These two tax sources, which are significant contributors to the state's overall collections, experienced volatility well above their 15-year trend levels during this period.
- The five states that bucked the national trend and recorded lower volatility in recent years compared with their long-term trends were Louisiana (-3.8%), Delaware (-8.8%), Tennessee (-10.9%), Washington (-25.5%), and Virginia (-26.2%). In each case, the decline was largely driven by increased stability in key revenue sources, such as insurance premiums and personal income taxes in Louisiana, corporate and personal income in Delaware, general sales taxes in Tennessee and Washington, and motor fuel taxes in Washington. Virginia’s revenue outperformed national trends before and after the pandemic, so its latest overall decline in volatility reflects more steady revenue growth compared with most states in recent years, softening the effects of the state’s sharp pandemic-era revenue swings.
- Oklahoma was the only state where tax revenue volatility remained unchanged during the latest five-year period compared with the 15-year trend.
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 44 states that impose them. Among these states, total personal income taxes had a volatility score of 11 for the 15 years ending in fiscal 2023, ranging from 30.8 in New Mexico to 5.7 in Kentucky. This score surged by more than half to 17 in the most recent five-year period.
- General sales taxes, historically one of the least volatile major tax streams, 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 2023, general sales taxes had a volatility score of 5.2, ranging from 17.8 in North Dakota to 3.2 in Maryland. Although the volatility score for total general sales tax revenue ticked up to 5.6 in the most recent five years, it was relatively stable over that span compared with other revenue sources.
- Corporate income taxes accounted for a major share of total tax revenue over the last decade in 30 of the 46 states that impose them. Among these states, corporate income taxes had a volatility score of 25 for the 15 years ending in fiscal 2023, ranging from 19.6 in New York to 13.7 in Maryland. This score surged by nearly half to 36 for the most recent five year period.
- 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 eight states where they accounted for enough revenue to be considered a major tax source. Collectively, severance taxes registered a volatility score of 38.2 for the 15 years ending in fiscal 2023, ranging from 53.1 in New Mexico to 26.3 in Montana. This score increased by nearly half to 55 for the most recent five-year period.
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 four states with the highest overall scores—energy-rich Alaska, New Mexico, 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 8.6% of Texas’ total tax collections over the last decade, compared with 53.4% of tax revenue in Alaska, 48.8% in North Dakota, 21.9% in New Mexico, and 31% in Wyoming.
Similarly, in the 30 states where corporate income tax was a major source of tax revenue, it was the most volatile major source in all but three: Montana, New Hampshire, and Tennessee. However, its average share of total tax revenue was under 10% in all but five of these states: Alaska, Illinois, New Hampshire, New Jersey, 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.
John Hamman is a principal associate and Gayathri Venu is an associate with The Pew Charitable Trusts’ state fiscal health project, and Justin Theal is a senior officer with Pew’s Fiscal 50 project.
Notes
Pew refined its methodology for assessing state tax revenue volatility in 2024, 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.
Seven data points for yearly percentage change in major tax sources were removed as outliers. 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.
Although 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.
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 May 16, 2024, and the National Conference of State Legislatures’ (NCSL’s) “State Tax Actions” reports from 2008 to 2023.
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 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 2009 to 2023 for the 15-year period and fiscal 2019 to 2023 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 2023—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 178 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 one outlier value for total revenue and 22 values for major tax sources.
We then examined each of these 23 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 seven of the 23 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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