Financial warning clouds: Tax revenue underperformed in 18 states, Pew reports

In a new analysis on state tax revenue trends, 18 states reported falling tax revenues, with California reporting the lowest.

According to The Pew Charitable Trusts' Fiscal 50 project, state tax revenue outperformed its long-term trend in 32 states, with Alaska leading all states by far. It collected more than 11 times, 1,041% more than, its long-term trend level, the report found. The states with the next-highest collections compared with their long-term trends were Wyoming (37.7%), New Mexico (32.5%), West Virginia (10.6%), and Montana (10%), the report found.

The analysis evaluated tax revenue trends, which measure the difference between recent state tax collections and a 15-year trend level, Pew explains. The data is adjusted for inflation and seasonality. "This approach provides a window into how current conditions compare with a state's long-term trajectory over the previous 15 years and may paint a different picture than recent state forecasts and relatively volatile quarterly and annual percentage changes," the report states. "A deeper understanding of long-term trends can help state leaders judge whether their budgets are on a sustainable path and allow for better-informed fiscal planning and policy formulation."

When tax revenue in the second quarter of 2023 was compared with 15-year trend levels, adjusted for inflation and seasonality, California had the weakest tax revenue of -16.2%, followed by Minnesota (-4.9%), New York (-4.8%), and Connecticut (-4%).

"California's underperformance is partially attributable to the recent delay in the income tax filing deadline for state residents, which pushed large sums of personal and corporate income tax payments from April to November," the report notes.

Overall, the number of states performing below their long-term revenue trends shifted dramatically, from four in the previous quarter to 18, according to the report. Fifteen new states reported below their long-term revenue trend: Arkansas, Colorado, Connecticut, Hawaii, Iowa, Maryland, Massachusetts, Michigan, Nebraska, New York, Ohio, Rhode Island, Vermont, Virginia, and Washington. Revenue in California, Minnesota, and Wisconsin was already below trend, the report notes.

The long-term trend value is defined "as the 15-year linear trend of tax collections leading up to each quarter, after adjusting for inflation and seasonality," the report explains.

Overall, total state tax revenue growth was 1.2%, or $4.2 billion, in the second quarter of 2023, below its 15-year trend, according to the report. Additionally, it points out: "For the first time since 2000, no state had fewer than a month's worth of operating funds in its total balances. Between fiscal years 2007 and 2021, 8 states ran long-term deficits, carrying forward costs of past services and government operations."

Tax revenue remained strong in the two largest red states. Both Texas and Florida were among 32 states whose total tax collections outperformed their long-term trend.

Among the 45 states that collect sales tax, Texas and Florida were among 40 whose sales tax revenue exceeded their long-term trend.

Their growth "stands out especially since state tax collections across the nation were 1.2% below their long-term trend," Alexandre Fall, senior associate with The Pew Charitable Trusts, told The Center Square.

As of the second quarter of 2023, Texas' tax collections soared 9.6% above its 15-year trend, bringing in an additional $1.9 billion. "The major contributor to Texas's strong performance was above-trend sales tax revenue, which accounts for 62% of the state's tax collections," she said. "These revenues were up 8.5%, or $1.1 billion, above the state's 15-year trend. Nationally, sales tax collections were 4.9% above their long-term trend."

Over the same time period, Florida's tax collections were also "notably strong, exceeding the state's 15-year trend by 6.5%, or $983 million," Fall said. "A significant factor in Florida's growth was above-trend sales tax revenue, which the state depends on for 61% of its tax collections. These revenues were 8.9%, or $847 million, above the state's 15-year trend. Nationally, sales tax collections were 4.9% above their long-term trend."

Overall, Fall said, "Understanding long-term trends helps state leaders determine if their budgets are sustainable and supports smarter fiscal planning. It's critical that policymakers consider why tax revenues are deviating from long-term trends—both overall and for specific revenue streams. This means looking at whether changes are due to policy shifts, external forces like demographic changes, or a mix of both. To ensure long-term fiscal health, lawmakers should also figure out if these deviations are due to temporary factors or if they signal a more lasting structural change that requires policy adjustments."