States Take in More Taxes Than Expected

States collected more tax revenue in fiscal 2020 than many budget analysts initially expected, given the global pandemic and recession that began this spring. Some analysts also are increasing their estimates for tax collections in fiscal 2021, which in most states began July 1.  

Connecticut, South Carolina and South Dakota ended fiscal 2020 with unexpected budget surpluses. And in states such as Colorado, Michigan and New Jersey, which ended the fiscal year in better shape than anticipated, budget analysts are revising their fiscal 2021 revenue estimates upward.

Back in April, many state and local leaders predicted catastrophic declines in tax revenue as stay-at-home orders shuttered businesses.

But state tax collections declined by just 5.5% in fiscal 2020 compared with fiscal 2019, according to the Washington, D.C.-based Tax Foundation. Preliminary data from 32 states shows a 4.4% decline in tax revenues last fiscal year, said the Urban Institute, another D.C.-based think tank.

Budget analysts warn, however, that tax revenues are still down and could fall further this fiscal year. Some factors that helped boost tax collections last year, such as a booming economy before the pandemic hit and trillions of dollars of federal aid to people, businesses, and state and local governments, may not come to states’ rescue this year. 

“The picture is still really bad,” said Lucy Dadayan, a senior research associate with the Urban-Brookings Tax Policy Center at the left-leaning Urban Institute. “Even if it’s not as bad as anticipated — it’s still bad, and it’s going to get worse.”

Sales tax collections cratered in April and May but rebounded as governors and mayors allowed businesses to reopen, said Jared Walczak, vice president of state projects at the libertarian-leaning Tax Foundation. He noted that online sales taxes helped.  

“As a lot of our consumption shifted to online purchases, many states are breathing a sigh of relief that it was easy to tax those transactions,” he said.

Income taxes are more complicated, Walczak said, as much of the money states are now collecting reflects 2019 earnings. 

“It’s always been expected that fiscal 2021 will be rougher than fiscal 2020, especially on the income tax front,” he said, “because that’s when most of the actual losses of income will be felt.”

Meanwhile, augmented federal unemployment aid — which, in most states, is considered taxable income — has helped boost income tax collections and kept laid-off workers spending.

Democrats and Republicans remain deeply divided over additional coronavirus relief aid for workers, businesses or state and local governments, however. Democrats, for instance, want to spend more than $500 billion on direct aid for state and local governments, while Republicans want to spend no more money on such aid.

Dadayan said $500 billion is the minimum amount of aid Congress should provide, considering the revenue declines state and local governments face and the costs of fighting the pandemic.

Walczak, however, said Congress should base further aid on the most recent data. “Proposals for $500 billion or even $1 trillion for state and local aid were predicated on expectations of much greater losses than we’re seeing right now,” he said.