Before COVID-19, Most States Posted Healthy Tax Revenue Gains

Without question, the economic shock from the COVID-19 pandemic has been sudden and unprecedented. In the span of just a couple months, restaurants and non-essential businesses have been shut down statewide and consumer spending on non-emergency items has plummeted. The full effect of these impacts will not be known for some time, but it is clear they will be meaningful.

Better Times

Tax revenue in the vast majority of states grew in the third and fourth quarters of 2019, reinforcing states’ coffers before their economies and finances were battered by the coronavirus pandemic, according to a new analysis by the Pew Charitable Trusts.

Since 2009, most states were unable to match their pre-recession benchmarks for total balances due to sluggish recoveries in tax revenue and airtight budgets. But an unexpected tax revenue surge in the 2018 budget year—fueled in part by one-time money—resulted in the largest ending balances since fiscal 2015.

tr_990According to the report:

As the United States surpassed its longest economic recovery on record, total state tax revenue at the end of the third quarter of 2019 was at its highest level since just before falling during the 2007-09 recession. Collections were 17.1% above their 2008 peak, just before revenue plunged, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations. Inflation-adjusted tax revenue was higher in 44 states than it was more than 10 years ago.

Download the data to see individual state trends from the first quarter of 2006 to the third quarter of 2019. Visit The Pew Charitable Trusts’ interactive resource, Fiscal 50: State Trends and Analysis to sort and analyze data for other indicators of state fiscal health.

As previously reported on Conduit Street, across the United States, state personal income increased by 4.4 percent in 2019, after increasing by 5.6 percent in 2018. In 2019, increases in earnings, property income (dividends, interest, and rent), and transfer receipts contributed to personal income growth in all states and the District of Columbia. The percent change in personal income across all states ranged from 6.1 percent in Colorado to 2.8 percent in West Virginia.

In Maryland, personal income increased by 3.7 percent in 2019, after increasing by 3.2 percent in 2018. Earnings growth in three industries—professional, scientific, and technical services; health care and social assistance; and state and local government —were the leading contributors to the overall growth and were leading contributors to growth in Maryland.

Property income for Maryland increased by 2.1 percent in 2019, after increasing 3.8 percent in 2018. Transfer receipts increased 6.9 percent in 2019, after increasing 3.9 percent in 2018.

What About Counties?

Today, counties are making significant financial investments to address immediate public health and safety needs. At the same time, counties are experiencing massive and unprecedented declines in revenue as a result of the coronavirus pandemic.

The combined effect of these changes will likely undermine county revenue structures and support for education, public safety, roadway maintenance, and other essential services.

As previously reported on Conduit Street, Comptroller Peter Franchot estimates that the pandemic may result in a 22% decline in state and local income tax withholding in the final quarter of fiscal 20, which would have a significant impact on state and local revenues. Counties are also experiencing sharp declines in transfer/recordation, admissions and amusements, and hotel tax revenues.

A long-term economic slowdown could also damage the commercial and residential real estate markets, which would likely result in a meaningful drop in local property tax revenues.

As previously reported on Conduit Street, according to the National Association of Counties (NACo), nationwide, the COVID-19 pandemic has the potential to impact county budgets by over $144 billion through fiscal 2021.

Stay tuned to Conduit Street for more information.

Useful Links

Pew Charitable Trusts: States Posted Healthy Tax Gains in First Half of Budget Year

Previous Conduit Street Coverage: Running on Fumes: Impact of COVID-19 on County Finances

Previous Conduit Street Coverage: Comptroller Delivers Grim Economic Outlook Amid COVID-19 Crisis

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