Like the federal government, state governments collect large amounts in tax revenue each year. In 2019, for example, state governments collected over $1.1 trillion in tax revenue, and in the same time period, the federal government collected $3.5 trillion.
State governments collect taxes in various ways, primarily individual income tax, general sales tax, and corporate income tax, though methods vary from state to state.
What has been the impact of COVID-19 on state tax revenue?
State tax revenue declined steeply in the second quarter due to the economic fallout of the COVID-19 pandemic. Many states enacted policies that forced businesses to close, thereby reducing sales tax collections. Many Americans were laid off and incomes fell, reducing income tax collections. Many states followed the federal government's policy and extended their spring income tax filing deadline until July, thereby pushing large portions of tax collections into the third quarter of 2020—a new fiscal year for most states.
The chart above shows the change in state government tax collections for the 12-month period of July 1, 2019 through June 30, 2020 and compares that figure to the previous 12-month period (July 1, 2018 - June 30, 2019). State tax collections fell 5.5% overall nationwide between the two 12-month periods. Alaska, North Dakota, and West Virginia saw notable declines due in large part to drops in severance taxes, which are taxes imposed on extracting natural resources. Connecticut had a disproportionately large decline in state tax collections of 20.9%. Only Alaska, North Dakota, and Connecticut had declines of more than 10%. California had the fourth-largest decline as its state tax collections were 9.9% lower. Tax collections increased in 10 states between the two 12-month periods: Idaho, South Dakota, Maine, Utah, Illinois, Alabama, Nebraska, Kentucky, Tennessee, and Montana.
Some of the state tax collection decline between July 1, 2019 through June 30, 2020 can be attributed to states moving their income tax deadlines beyond June 30, thereby aligning with the federal government’s shifting from April 15 to July 15. For example, Connecticut extended its deadline, causing tax collections in April 2020 to be around $1 billion lower than in April 2019 per the website for the state’s chief data officer. On the other hand, Idaho only extended its deadline to June 15, which partially explains why Idaho was one of the 10 states that actually had a tax collection increase between the two 12-month periods.
What types of taxes were hardest hit?
Income taxes decreased most dramatically, due partly to the deadline extensions. Sales taxes were down modestly (0.9% nationally) between the two 12-month periods. Other tax collections, including corporate income taxes, licenses, and severance taxes, among others, were down 8.2% nationally. Much of this decline is due to states extending corporate income tax deadlines.
How much less revenue was taken in the second quarter of 2020 compared to the same quarter last year?
The tax collections changes between the two 12-month periods of July 1, 2019-June 30, 2020 and July 1, 2018-June 30, 2019 would only reflect around three months of COVID-19 related impacts given that COVID-19 restrictions were enacted in mid-March 2020.
Directly comparing the second quarter of 2020 to the second quarter of 2019 highlights a massive decline in state government tax collections of 29% with two states (Alaska and Connecticut) seeing their state tax collections cut in half for the second quarter. Only Idaho, Maine, and South Dakota saw increases from second quarter 2019 to second quarter 2020.
What does this mean?
The second quarter of 2020 could go down as a historical anomaly in government finances at all levels. State tax collections for that quarter declined for two key reasons:
(1) Governments delaying tax payment deadlines for individuals and businesses from April to July to align with the federal government.
(2) Reductions in taxable economic activity resulting from both voluntary social distancing practices by Americans and from government-imposed lockdowns.
If this decline in tax revenue continues through 2020, state governments may have to make difficult choices in balancing their budgets, potentially cutting programs or workforce. At the current time, however, state governments have lost fewer jobs than the economy overall—there are 4% fewer jobs in state government compared to August of last year, compared to 7% fewer jobs for the economy overall.
For more information on the impact of COVID-19 and to explore state tax revenue in greater detail, check out the USAFacts COVID-19 Impact and Recovery Hub.
