At the end of 2023, tax revenue was below long-term trends nationally and in 28 states, the most since the second quarter of 2014 when states were still recovering from the 2007-09 Great Recession. The count of states underperforming their 15-year trajectories has steadily increased in recent quarters as collections have declined from the unexpectedly high levels they reached during the second and third budget years of the COVID-19 pandemic.
Nationally, tax revenue was 3.2% below its 15-year trend, after adjusting for inflation and smoothing for seasonal fluctuations. By contrast, at their peak in the second quarter of 2022, actual tax revenue collections were 14.9% above trend—greater than at any point in at least 15 years. The recent declines from pandemic highs largely reflect a return to growth rates more aligned with historical averages. Though most past revenue declines of similar magnitudes have coincided with recessions, the current trend is primarily due to waning temporary pandemic factors and widespread tax cuts.
And although many states anticipated the revenue slowdown, the declines nevertheless highlight growing fiscal challenges. As the nation moves past its brief but extraordinary period of widespread surpluses and historic revenue growth, policymakers will likely have less new money to fund policy priorities such as tax cuts, increased funding for public services, and recession preparedness.
The states that were the furthest below their long-term trends were California (13.9% below trend), Connecticut (8.2% below), and Minnesota (8.1% below). California’s and Connecticut’s deviations can be explained, in part, by a poor stock market performance in 2022. A substantial slowdown in initial public offerings also lowered collections in California. By contrast, a major factor influencing Minnesota’s performance was the implementation in fiscal year 2024 of one of the largest tax cuts (by dollar amount) across the states.
Despite the collective dip below trend, in nearly half of states, tax revenue levels remained above their 15-year trajectories, reflecting their relative overall strength and the scale of the pandemic highs from which collections have descended. Even so, in most of these above-trend states, revenue declined during the fourth quarter of 2024.
In total, 37 states reported lower year-over-year inflation-adjusted tax revenue in the fourth quarter of 2023, with declines ranging from 41.3% in Alaska and 20.9% in Wyoming to less than 1% in Indiana and Michigan. Alaska’s and Wyoming’s declines were driven by falling energy prices, which weakened severance tax collections—these energy-rich states’ largest and second-largest tax revenue source, respectively.
Nationally, state tax revenue rose 1.8% in the fourth quarter of 2023, ending a five-quarter streak of declines. But these gains can largely be attributed to a temporary shift in California’s income tax filing deadline. Excluding California, state tax collections continued to fall.
As a result, the fourth quarter saw an increasing number of states underperforming their long-term trends. At the end of the third quarter of 2022, tax collections in all 50 states were performing above their 15-year trends, but the number performing below their trends grew rapidly after that, starting with just one state at the end of 2022, rising to four by the end of the first quarter of 2023, then 17 by the end of the second quarter of 2023, and finally reaching 28 in the fourth quarter.
A comparison of tax revenue in the fourth quarter of 2023 and 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 fourth quarter of 2023, general sales and corporate income taxes outperformed their 15-year trends while personal income taxes underperformed.
State tax collections have been on a downward trajectory since their mid-2022 peak, reflecting, in large part, a decline from the unexpected highs of the pandemic revenue wave.
Monthly data from the Urban Institute shows that total inflation-adjusted tax collections remained stagnant nationwide through the first five months of calendar year 2024. And fiscal year-to-date collections through May 2024 were down $2.6 billion (0.2%) compared with the same period a year earlier. The decline would have been steeper had it not been for California’s double-digit increase during the period, which strongly boosted collections nationwide. In fact, nearly four-fifths of states were running behind 2023 levels during the first 11 months of fiscal 2024.
Yet despite the stagnation, many states outperformed their revenue forecasts. According to the National Association of State Budget Officers (NASBO), 33 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 the waning of the 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. The recent weakening in revenue growth largely reflects the unwinding of these factors and a return to more normal conditions following the brief boom.
One question is whether states will be able to afford the budgetary commitments they made in the past three 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.