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.