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.
During the 15 years ending in fiscal 2023:
During the five years ending in fiscal 2023:
A comparison of state tax revenue volatility scores between the latest five-year period and the longer 15-year trend shows that:
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.
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.
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.