OverTraders.com is looking forward to shining a light on this exciting new trend in state tax revenue. We’ll dive into what these trends might portend for the indispensable services we all rely on. Consider it an informal talk about the economy and what it all means for our everyday lives. So, let’s take a look at what tax revenue is looking like from state to state.
Overview of State Tax Revenue Trends
Tax revenue is the lifeblood of state and federal governments. It funds our communities’ core services from education to infrastructure, health care and public safety. When tax revenue decreases, it can trigger a domino effect, cutting critical services and programs that communities rely on. Picture this—here’s where we are today. As of the end of Q3 2022, tax collections in all 50 states exceeded their 15-year averages. This bright spot is illustrative of the overall financial success happening across the nation. The tide began to turn as additional states went under their long-term revenue trends.
Recent Developments in State Revenues
Fast forward to the end of Q2 2023 and that picture looks very different. At that time, only eighteen states had tax revenue that was lower than what their 15-year historical trend would have predicted. California had the largest miss, taking in 16.2 percent less than anticipated. This very real downturn, the end to be sure of a surprising and unexpected boom in state tax collections, is part of a bigger story. These increases were an accomplishment considering that those were the second and third budget years of the COVID-19 pandemic.
Impact of the Pandemic on Tax Trends
The COVID-19 pandemic also produced distinctive economic circumstances. At first, almost all states enjoyed surprise windfalls of tax revenue. This was largely because of the effects of federal stimulus payments and changes in consumer spending. With the pandemic receding and, for many states, a return to more normal economic conditions, state tax collections started going in the other direction. This drop reminds us all why it’s important to look at long-term trends and not over-rely on short-term revenue increases.
Analysis of Tax Types
To fully understand the shifts in state tax revenue, it's essential to look at the different types of taxes that contribute to state coffers. Those three main sources are the personal income tax, the general sales tax, and the corporate income tax. Collectively, these taxes make up nearly three-quarters (74%) of all state tax dollars collected.
Trends by Tax Type
That’s why in the second quarter of 2023, corporate income tax collections jumped. They were $6.3 billion, or 25.6%, above their 15-year trend. Personal income tax revenue exceeded its long-term trend by a significant margin in New Mexico (1.2%) and Delaware (0.7%). By fiscal year 2023, 39 states brought in worse-than-inflation tax revenue than the year prior. This marked the largest number of states declining since fiscal year 2020. At the zoomed-in scale, 34 different states had corporate income tax collections above their long-term trend. These went as low as 218.3% above trend in Alaska to only 3% above trend in Oregon. On the other hand, 39 states experienced corporate income tax collections lagging long-term trends. In North Dakota, the numbers were 32% under trend. Oregon was next in line with a 31.9% drop, with Indiana and Oklahoma not far behind with essentially no decreases at less than 1%.
All fifty states are experiencing their general sales tax collections exceeding long-term trends. In Alaska, collections exploded by an incredible 584%, though Minnesota’s increase was more modest at 2.5%. At least 40 states were seeing general sales tax collections above long-term trends. These were as high as 15.2% in New Mexico and as low as less than 1% in Connecticut (0.9%) and Pennsylvania (0.2%). By contrast, general sales tax revenue lagged below its long-term trend in five states. These were Iowa (0.5% below trend), Louisiana (1.1%), Virginia (1.7%), Kansas (1.7%), and Ohio (2.2%).
Federal Transfers to State and Local Governments
Beyond state-generated tax revenue, federal transfers have become extraordinarily important in funding the daily operations of state and local governments. These transfers keep the federal government’s grants to states for education, infrastructure, healthcare, and other critical programs flowing. Even slight fluctuations in federal funding levels have a domino effect on how much of these essential services a state can afford to maintain.
Federal Funding Insights
Just as federal funding is a key ingredient to building back better, it’s necessary to the current state of state budgets. These dollars pay for everything from educating our children and caring for the sick to building our infrastructure and ensuring public safety. Knowing what direction federal funding levels are shifting in is a crucial piece of understanding the deeper financial picture that states are in.
Decrease in Federal Transfers from FY 2023 to FY 2024
Federal transfers to state and local governments experienced the largest year-over-year drop from FY 2023 to FY 2024. Total federal transfers dropped a whopping $987.2 billion in FY 2023 to just $892.4 billion in FY 2024. This is a reduction of $94.8 billion or 9.6%. This unprecedented decline forces states to make drastic cuts and balance their budgets on the backs of their residents. States are left to either cut services, raise taxes, or otherwise finance their newfound state.
Composition of Federal Transfer Spending in FY 2024
Fiscal Year 2024 federal transfer spending was focused on these major categories. Here’s a breakdown:
Medicaid: $507.4 billion
Highways: $75.5 billion
Education: $73.4 billion
Housing: $46.6 billion
Other: $189.5 billion
Changes to these allocations can immediately affect the services and programs that states are able to deliver. For instance, a reduction in federal education funding might force schools to slash programs or lay off teachers.
Importance of Assessing State Tax Revenue Trends
Following state tax revenue trends is crucial for understanding a state’s fiscal condition. The trends mentioned above have a direct, tangible impact on government’s ability to provide vital services. Groups such as Pew Charitable Trusts examine key national trends. These are helpful illustrations for both policymakers and the traveling public.
Why Pew Evaluates Tax Revenue Trends
Pew Charitable Trusts evaluates state tax revenue trends to provide policymakers and the public with reliable information about state fiscal conditions. This analysis helps states make informed decisions about budgeting, spending, and taxation. By understanding these long-term trends, states can be better prepared for significant economic downturns, help prevent unexpected cuts to important services, and maintain public confidence in government.
Methodology Used for Analysis
Pew applies the same rigorous methodology across states to provide a uniform look at state tax revenue trends. That means accounting for inflation, seasonal smoothing, and determining how today’s revenue levels stack up against long term historical averages. By applying an objective and uniform methodology, Pew is able to offer a reliable look at the state of fiscal conditions across the states over time.
Additional Resources
For those looking to delve deeper into state tax revenue trends and related topics, there are several valuable resources available. These resources offer more data, analysis and expertise that will better equip you to keep your finger on the pulse of state fiscal conditions.
Page Sources
Offers in-depth analysis of state fiscal conditions, including tax revenue trends, budget issues, and economic forecasts.
National Association of State Budget Officers (NASBO): Provides data and analysis on state budgets, including information on revenue sources, spending priorities, and fiscal challenges.
Center on Budget and Policy Priorities (CBPP): Offers research and analysis on federal and state budget issues, with a focus on policies that affect low- and moderate-income families.
Many states have their own websites that provide detailed information on state budgets, tax revenue, and economic conditions.
Subscription Information
Stay up-to-date on the latest trends and analysis by subscribing to newsletters and publications from organizations like Pew Charitable Trusts, NASBO, and CBPP. These resources provide helpful, timely information and unique perspectives. They equip you with the knowledge you need to be vigilant watchdogs for your state’s fiscal health.
The IRS Factor
The Internal Revenue Service (IRS) is perhaps the most important agency in the federal government’s entire revenue collection system. We find that increases in IRS funding and staffing have a large effect on the revenue collected. Budget Lab further projects that increasing appropriations for the IRS by $80 billion over the next decade, as provided in the Inflation Reduction Act (IRA), would lead to a net revenue increase of $637 billion. This effect would play out over a 10-year budget window. Assuming the IRS follows through on their plan to shrink their workforce by 50%, that still means over 50,000 employees would be laid off by the IRS. The Budget Lab calculates this drastic cut will result in a loss of $395 billion in revenue, $350 billion net over that same period.
If the IRS is not sufficiently resourced, noncompliance may increase even more sharply. This would lead to a jaw-dropping $2.4 trillion in lost revenue over the next 10 years. It isn’t just you. As of February 20, 2025, the IRS has already laid off about 7,000 employees. Shockingly, more than 5,000 of those who were impacted were in compliance arms. Just last year, headlines warned that the Trump Administration was trying to cut the IRS workforce in half. These drastic cuts would be disastrous for federal revenue collection.
What does this mean for you?
Understanding these trends is essential for everyone, whether you're a trader, investor, or simply someone who cares about their community. Tax revenue and federal funding fluctuates, which can directly affect the services you rely on. This includes critical priorities like our schools, infrastructure, healthcare, and public safety. Continue to learn about and publicly defend the importance of these issues. You can do this by helping make sure your state is equipped with the latest tools and resources to flourish.
The Roller Coaster of Revenue
The strange and unprecedented world of state tax revenue has been a roller coaster, with incredible highs and historic lows. To better understand this dynamic, let's look at the key factors influencing these trends:
Economic Growth: When the economy is booming, people earn more, spend more, and companies make more profits. This results in increased tax revenues for states.
Consumer Spending: Sales taxes make up a big chunk of state revenue. When people are buying cars, clothes, and gadgets, states collect more tax dollars.
Corporate Profits: Corporate income taxes are another important source of revenue. That’s because when companies are thriving, states receive more of their profits.
Federal Policies: Decisions made in Washington, D.C., can have a big impact on state budgets. This is why federal grants and funding are so important—especially to help states continue operating as providers of last resort.
- Demographic Shifts: Changes in population size and age can affect tax revenues. For instance, if their area is experiencing a fast-growing population, that would mean more people using services and paying taxes.
Navigating the Fiscal Seas
State tax revenue genuinely is impacted by a variety of factors. That’s why it’s so important for states to look ahead and prepare to adapt. Here are some strategies states can use to navigate these fiscal seas:
Relying too heavily on one type of tax can be risky. States can find unique opportunities to diversify their revenue streams by creating entirely new taxes or fees.
Build Rainy Day Funds: Setting aside money during good times can help states weather economic downturns.
Invest in Education and Workforce Development: A well-educated and skilled workforce can boost economic growth and increase tax revenues.
Promote Economic Development: Attracting new businesses and industries can create jobs and generate more tax dollars.
Improve Tax Collection Efficiency: Making it easier for people to pay taxes and cracking down on tax evasion can help states collect more revenue.
The Big Picture
The vitality of state tax revenue as a whole is tightly linked to the general economic environment. With a strong economy comes increased tax revenues. This historic increase provides states with significant new resources to invest in equitable, connected, and climate-smart infrastructure, essential services and programs. Recessions usually result in a sudden drop in tax revenues. This leaves states with difficult choices about what to spend money on and how to tax residents.
Final Thoughts
State tax revenue is not only complicated but highly fluid. By identifying the key trends, forces and dynamics that drive state fiscal conditions we’re able to get a clear picture. This deep understanding of the challenges and opportunities our states face. By engaging with these issues, we can help ensure that our communities have the resources they need to thrive. OverTraders.com is all about providing you the invaluable information and insight you need to gain an edge. We expand your understanding of marketplaces, their economic underpinnings, and the tectonic market shifts that define today’s economy.
