State Tax Revenue Growth Approaches Possible Inflection Point

Note: This data has been updated. To see the most recent data and analysis, visit Fiscal 50.

From January 2020 through the end of most states’ 2022 budget year, tax revenue outperformed its pre-pandemic growth trajectory in a record 32 states. Still, annual revenue growth rates slowed substantially during fiscal year 2022 and are on track for negative growth by the end of the current budget year amid looming economic uncertainties.

As the second quarter of 2022 came to an end, total state tax revenue was at its highest level since just before its historic decline in early 2020, thanks to a series of substantial and unexpected gains during the past two fiscal years. Collections were 20.7% greater than those for the final quarter of 2019, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations. Only Wyoming had not taken in enough revenue to surpass its pre-pandemic levels.

Nationwide and in 32 states as of the end of the second quarter of 2022, 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 17.1% more cumulative tax revenue than it would have collected under its pre-pandemic growth rate. Idaho was second at 16.7% above the trend. Nationally, combined tax revenue at the end of the second quarter of 2022 was 4% above estimates of what might have been collected had the pandemic not occurred.

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However, estimates also show that cumulative tax revenue fell short of its pre-COVID growth trend in slightly more than a third of states since the pandemic’s onset. This suggests less extraordinary growth than the recent spate of budget surpluses and the scale and scope of enacted tax cuts might otherwise indicate.

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 increases that were skewed by this particularly volatile period. For each of the ten quarters from Jan. 1, 2020 to June 30, 2022, 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.

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Nearly every state experienced tax revenue gains for the second year in a row in fiscal 2022, but annual growth rates slowed substantially compared with the record pace set in the previous fiscal year. After adjusting for inflation, overall tax receipts rose 8.2% from July 2021 through June 2022, the budget year used by most states, compared with the same period a year earlier. This amounts to the second-highest growth rate in nearly 40 years, eclipsed only by a record spike of 20.2% in fiscal 2021.

Just two states bucked the national trend and took in less tax revenue in fiscal 2022, after adjusting for inflation, than in fiscal 2021: Ohio and Wisconsin. In each case, collections yielded nominal year-over-year gains but were not large enough to offset increases in the prices of goods and services.

Preliminary monthly data from the Urban Institute shows that total inflation-adjusted receipts fell in all but one month from July to December 2022 but also that declines have been less steep than initial projections. According to the National Association of State Budget Officers, states enacted their fiscal 2023 budgets anticipating a 3.1% annual decline in general fund revenue amid weakening economic conditions and waning temporary factors that had bolstered recent growth. Many states, however, have recently revised their forecasts upward in response to greater-than-expected strength in the labor market and consumer spending.

Despite this surprise strength, most state and economic experts expect annual state tax revenue growth to temper substantially in fiscal 2023, as state finances appear to be at a turning point. Although higher-than-expected tax revenue growth, abundant federal aid, and record financial reserves have improved budget conditions recently, states must navigate several looming challenges, including slowing revenue growth as the economy weakens and monetary policy tightens, historically high inflation, and a tapering of federal COVID-19 aid.

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 recent fiscal conditions. For instance, 31 states enacted net tax cuts in their fiscal 2023 budgets, building on the 18 states that enacted reductions as part of their fiscal 2022 budgets. 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, joining the 25 states that enacted across-the-board increases during fiscal 2021.

To better understand whether they can afford these commitments and to prepare for possible future fiscal challenges, states can use two forward-looking fiscal management tools: long-term budget assessments, which help policymakers identify challenges that can build over time, and budget stress tests, which help states determine their risk from adverse events and how much they should set aside in rainy day funds.

State highlights

A comparison of inflation-adjusted tax revenue between Jan. 1, 2020 and June 30, 2022—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 17.1% 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 Idaho (16.7%), New York (14.0%), Illinois (10.8%), Utah (10.5%), and Montana (10.1%).
• In 49 states, revenue met or exceeded 2019 levels just before the pandemic, and in 17 of those states, collections remained below pre-COVID growth trends: Alaska, Delaware, Hawaii, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada, New Hampshire, North Dakota, Oklahoma, Oregon, Texas, Washington, and Wisconsin.
• Only Wyoming did not take in enough revenue to return to pre-pandemic levels, much less catch up to pre-COVID growth trends. Since the start of the pandemic, natural resource-dependent states have had some of the deepest declines in tax revenue. Recently, however, these states have experienced a sudden turnaround, with stronger tax revenue growth due largely to rising energy prices.
• Most states (32) were below their pre-pandemic growth trends at the beginning of fiscal 2022. However, nearly half (14) of these states surpassed this recovery milestone over the course of the last four quarters: Alabama, Arizona, Connecticut, Florida, Indiana, Massachusetts, Missouri, New Jersey, North Carolina, Pennsylvania, Rhode Island, South Carolina, Virginia, and West Virginia.

Recent trends

Tax revenue grew collectively and, individually in most states in the second quarter of 2022, strengthening an already remarkably fast recovery since the 2020 recession. Overall, after adjusting for inflation, collections during the second quarter of 2022 grew by 7% compared with those from the same period in 2021, building on the unexpectedly high gains that have characterized state tax revenue during the pandemic era. Forty-seven states reported higher year-over-year inflation-adjusted tax revenue in the second quarter of 2022, ranging from 167.2% in Alaska and 25.9% in North Dakota to less than 1% in Maryland and Ohio. Collections in Alaska and North Dakota benefited from boosts in severance tax revenue related to the rise in crude oil prices, which surpassed $100 a barrel for the first time since 2014. Severance tax revenue are Alaska and North Dakota’s largest tax source.

Three states—Minnesota, New Mexico, and Wisconsin—took in less inflation-adjusted revenue in the second quarter of 2022 than in the second quarter of 2021. In each case, collections resulted in nominal year-over-year gains but were not large enough to offset increases in the prices of goods and services during the same period.

Nationally, state revenue benefited from robust growth in all major tax streams. Personal income taxes, which are the largest source of total state tax revenue, grew by an inflation-adjusted 6.5% in the second quarter of 2022. Strong employment growth and rising wages were major contributors to this increase, along with still-elevated short-term government aid to individuals. Sales taxes, which are states’ second-largest revenue source, posted an inflation-adjusted quarterly gain of 1.8%, supported by elevated—yet, notably slowing—consumer spending and 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.

Various factors drove these higher-than-expected collections, including unprecedented federal aid that helped support businesses and unemployed workers, quicker-than-anticipated recoveries in the stock market and employment, states’ relatively recent authority to collect sales taxes from out-of-state online sellers, and job stability in higher-wage professions that were able to pivot to remote work. In addition, record funding levels of rainy day funds and historic federal aid to state governments gave state budgets extra breathing room.

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.

Further, since the start of the pandemic, natural resource-dependent states, such as Alaska, North Dakota, and Wyoming, and those reliant on tourism, such as Hawaii and Nevada, have 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.

Justin Theal is an officer and Alexandre Fall is a senior associate with The Pew Charitable Trusts’ state fiscal policy project.