State taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections declined 4.4 percent in aggregate through the end of September compared to the same nine months in 2019, according to U.S. Census Bureau data released today. The median state experienced a decline of 3.6 percent, and total state tax collections were $37.4 billion lower in the first nine months of 2020 than in the same period in 2019. Local revenues were actually up $29.8 billion over the period, demonstrating the stability of major local revenue sources (property and, to a less extent, sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es). Combined state and local tax collections were down only $7.6 billion across the period, representing a total state and local tax revenue decline of 0.7 percent compared to the first nine months of 2019.
While any revenue decline is of concern to state officials, some projections made early in the pandemic would have indicated revenue declines into the hundreds of billions of dollars by now.
Ten states saw higher state tax revenues in the first three quarters of 2020 than they did in 2019, led by Idaho (+12.2 percent). Interestingly, Illinois (+7.8 percent), which saw a strong pre-pandemic first quarter and mostly covered its second-quarter decline with a robust third quarter (substantially due to delayed income tax collections), is second, followed by Arkansas (+6.4 percent) and Alabama (+4.5 percent).
Conversely, nine states experienced double-digit losses, led by Alaska (-25.8 percent), which, like North Dakota (-22.7 percent), relies heavily on severance taxes and had already been battered by plummeting energy prices before their economies were hit by a global pandemic. Among states without heavy reliance on the energy sector, Connecticut (-25.4 percent), Hawaii (-16.7 percent), and Washington (-15.6 percent) have struggled the most.
The first quarter of 2020 was one of strong revenue growth across the country, helping offset some of the early pandemic losses. During the first six full months of the pandemic, from April through September, state tax revenues declined 8.0 percent nationwide, with a median loss of 5.7 percent. The second quarter, running April to June, saw the economic effects of the pandemic in full swing, as state stay-at-home orders led unemployment to skyrocket to 14.7 percent in April (at 6.7 percent as of November) and drastically curtailed consumption as nonessential retail was shuttered. Since then, consumption—and the related tax revenue—has returned to its pre-pandemic trajectory. At the same time, income taxes, while down, are performing relatively well, with substantial assistance from three sets of federal actions.
First, the Paycheck Protection Program helped maintain employment levels and get some people back to work, which not only had the vitally important primary effect of ensuring paychecks for many Americans, but also preserved a source of income tax revenues for states. Second, the Federal Pandemic Unemployment Program (FPUC) provided an additional $600, and now $300, a week in federally funded unemployment benefits. Unemployment compensation is itself taxable, also propping up income tax collections. Finally, actions by the Federal Reserve are widely credited with helping stabilize financial markets, which has kept revenue from capital gains income stable—something that has not happened in previous recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. s. During the Great Recession, for instance, the realization of capital gains slid 71 percent. They declined 55 percent in 1987 and 46 percent in 2001. There was every reason to expect a similar crash this time, which would have cut deeply into state revenues, particularly in states which rely substantially on high-rate taxes on high earners. The stock market is not the economy, but it is certainly an important factor in state tax collections.
The federal government has already provided as much as $535 billion to state and local governments, though only a portion of that is “flexible” funding that can be used to backfill state revenue shortfalls, rather than in responding to the economic and public health consequences of the COVID-19 pandemic. However, the flexible and semi-flexible aid received by states thus far is already multiple times the $37.4 billion in revenue losses they have experienced. States received about $106 billion in fungible aid under CARES Act disbursements. Additionally, generous guidance on the use of the $150 billion in Coronavirus Relief Fund revenues allows it to be used to pay the salaries of public safety and public health officials, or to pay out unemployment compensation claims, among other uses.
Lower revenues will, of course, continue for some time longer. The second quarter of 2021 is likely to come in substantially lower than the same quarter in 2019, though almost certainly far higher than it did this year. This anticipated poor revenue performance is because, while individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es are collected throughout the year through withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. and quarterly estimated payments, April remains an important income tax revenue month. And next April’s payments will be on income earned in tax year 2020.
States are not out of the woods yet. Some states, particularly those heavily reliant on tourism or the energy sector, are struggling disproportionately to their peers, and others fear that the worst is yet to come. This is particularly salient in states which fear that temporary relocations due to the COVID-19 pandemic may turn into long-term outmigration. The forced experiment in remote work is creating enhanced location flexibility for employers and employees alike, many of whom may relocate to states with lower taxes and a lower cost of living if doing so does not mean sacrificing a job (for employees) or access to a qualified workforce (for employers). But for now, at least, the news is largely good, considering that we are in the midst of a pandemic. In California, for instance, revenues from July to October are 21.6 percent above projection, with the state now projecting that it overstated biennial revenue losses by $26 billion.
The enactment of a proposed $160 billion state and local relief package this month is increasingly unlikely, but collections data to date—including preliminary numbers for October and November in some states—continue to indicate that whatever needs may exist are not dramatic at this time. Most states are able to cover these losses with their existing revenue reserves and the federal aid they have already received, often without making any spending adjustments at all. Moreover, since state fiscal years typically end in June (New York is a notable exception), Congress would still have time to provide additional aid in the new year should members believe it necessary.
The following table shows state tax revenue declines, both calendar year-to-date (January through September) and during the first six full months of the pandemic (April through September). The next Census Bureau data release, covering the final quarter of calendar year 2020, is due out in March 2021.
|State||Year-to-Date||Quarters 2 & 3|
|District of Columbia||-4.5%||-7.5%|
Sources: U.S. Census Bureau; Tax Foundation calculations.
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