State Tax Revenue Passes a Recovery Milestone

For the first time since COVID-19 sent state finances into a tailspin, tax revenue has grown enough to erase its initial pandemic losses in a majority of states, and total collections nationwide were poised to do the same.

After an initial sharp plunge, state tax revenue recovered enough as of February 2021 that 29 states had taken in as much or more revenue in the 12 months since the pandemic began as they did in the 12 months before the pandemic, according to preliminary monthly data from the Urban Institute. Idaho led all states with 11% more tax revenue as of February compared with pre-pandemic levels.

Total state tax receipts were only 0.01% higher for March 2020 through February 2021 compared with the same months a year prior, based on the institute’s preliminary data, which covers 49 states and is the most current available. This means that for states collectively, cumulative tax revenue since the onset of COVID-19 reached pre-pandemic levels for the first time, though without adjustments for inflation.

States reached the milestone of enough monthly gains to offset monthly losses since the start of the pandemic far faster than after at least the previous two recessions. It marks just the start of states fully making up for the effects of this recession, which pulled down tax collections in the 50 states by far less than initially projected—though with unusually disparate results across states.

Even flat revenue growth can open budget gaps because states count on annual increases in tax receipts to keep up with public services for a growing population, new spending demands, and inflation. Plus, recovery nationally to pre-pandemic levels disguises the fact that cumulative tax collections remained depressed as of February in at least 18 states, by as much as 49.2% below the same 12-month period a year earlier in Alaska and more than 10% below in at least three other states.

States will be able to use federal aid from the recently enacted American Rescue Plan Act to cover losses in tax dollars, which make up more than 80% of general fund budget spending in the 50 states. Those with smaller tax revenue declines to address while balancing their budgets will be able to use more of the $195 billion aid package for other purposes, such as offsetting COVID-19 expenses, easing economic distress on people and businesses, or investing in water, sewer, or broadband projects.

The cumulative change in tax collections shows the net result of year-over-year differences in monthly receipts, which were exceptionally volatile in the 12 months after COVID-19 was declared a pandemic. According to Urban Institute data, receipts in the first four months collectively were down $77.8 billion from a year earlier—including steep declines in April and May—then posted consecutive monthly year-over-year gains since July 2020 that totaled $77.9 billion as of February 2021. The sharpest year-over-year drop in monthly revenue in April (-49.2%) and the largest gain in July (75.1%) were primarily due to a delay in the income tax filing deadline that shifted large sums of payments from April to July.

State-by-state highlights

February marked the first time a majority of states had made up for their pandemic losses—only 23 states had done so as of January. A comparison of tax dollars reported for the 12 months since the start of the pandemic (March 2020 through February 2021) with the same period before the pandemic shows:

• Tax revenue in 29 states had overcome its pandemic-driven losses, with the largest gains from prior year collections in Idaho (11%), Utah (8.7%), Colorado (8.0%), South Carolina (7.7%), and South Dakota (7.2%).
• Losses still exceeded gains in at least 18 states, with collections running furthest behind in Alaska (-49.2%), Hawaii (-17.4%), North Dakota (-10.9%), and Texas (-10.3%). In addition, tax revenue through January also was running behind in Nevada (-10.8%), and New Mexico (-2.5%).
• South Dakota is the only state that avoided posting any loss in its cumulative revenue since the start of the pandemic, compared with the prior 12 months. By contrast, 10 states consistently reported losses: Alaska, Arkansas, Hawaii, Minnesota, Missouri, Nevada, Oklahoma, Oregon, Pennsylvania, and Texas. (Nevada’s data was through January.)
• Among the states that have overcome early pandemic losses, Idaho in June 2020 was the first to see its cumulative revenue return to pre-pandemic levels—after just four months. It was followed a month later by Colorado, Georgia, Nebraska, and Vermont.
• Maine, Rhode Island, and Virginia slipped out of early tax revenue recoveries mid-year, but all three states are again reporting gains in cumulative revenue compared with prior year collections.
• Six states’ cumulative tax collections grew enough to offset prior losses for the first time in February: Ohio (0.1%), Illinois (0.1%), Iowa (0.2%), Massachusetts (0.2%), Delaware (0.4%), and New York (0.5%).
• Although no monthly tax revenue data was available for Wyoming, the state’s own revenue forecast in January projected a 23% drop in fiscal 2021 in the two main accounts that fund general operating expenses, following an 18% loss in fiscal 2020.

Behind the trends

This recession has been unusual in its cause, sudden impact, and wide-ranging effects on state tax revenue. The fiscal fallout has played out differently because of factors including each state’s economic makeup, the share of jobs that can be performed remotely, the mix of taxes imposed, and differences in COVID-19 caseloads and public health restrictions, such as temporary business closures and limits on gathering sizes.

Oil-producing states, such as Alaska and North Dakota, and those reliant on tourism, such as Florida, Hawaii, and Nevada, have had among the deepest and the longest-running declines in tax revenue since the pandemic’s start. Reduced travel in the wake of COVID-19 hurt businesses and jobs in the leisure and hospitality industry within tourism-reliant states and also lowered demand for fuel for airplanes and vehicles, further depressing tax revenue in energy states already coping with pre-pandemic declines in oil and natural gas prices.

However, states’ fiscal prospects have brightened considerably with the increasing pace of vaccinations, the easing of public health restrictions, predictions of strong national economic growth, and the latest dose of federal aid for taxpayers, businesses, and state and local governments. A few states with high proportions of leisure and hospitality jobs and certain energy states may continue to face challenges, according to recent S&P Global Ratings reports, though the analyses noted that Nevada and Texas—both posting tax revenue losses through February—were predicted to end 2021 with some of the fastest economic growth in the nation.

The next milestones for state tax revenue will be recovering enough to outgrow inflation and then to show progress in regaining growth above pre-pandemic levels.

Barb Rosewicz is a project director, Justin Theal is an officer, and Alexandre Fall is an associate with The Pew Charitable Trusts’ state fiscal health project.