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A new survey of budget officials shows that economic activity and tax revenue improved or fully recovered for most states by the end of 2020.
The coronavirus health crisis that led to government-ordered shutdowns last spring hammered states’ finances for months, but a new report highlights how many of them emerged from the pandemic-induced recession in solid fiscal shape.
Economic activity and tax revenue improved or fully recovered in most states by the end of 2020, according to a survey of state policymakers released Tuesday by the Urban-Brookings Tax Policy Center. Year-over-year total state tax revenues declined by $77 billion, or 26%, April through June 2020 but increased by $49 billion, or 23%, July through September.
While a lot of budget officials voiced optimism about their states’ financial situation, others indicated that fiscal 2021 revenues will fall short of 2020’s totals, the report notes. Notably, the survey was conducted prior to the passage this year of the American Rescue Plan Act, which is providing states and localities with $350 billion in federal aid.
The center says state revenues recovered last year because unemployment was largely concentrated among low-income workers, particularly in the service sector, while high-income workers were largely unaffected by job losses. As a result, states—especially those with progressive taxes—did not see large declines in income tax revenues. (Nevertheless, states most reliant on leisure and hospitality taxes suffered the most.)
Also, the federal coronavirus relief aid doled out in spring 2020 mitigated the recession’s financial impact on taxpayers, businesses and state and local governments. Finally, although sales tax revenues immediately declined when the pandemic started, they recovered quickly because most states garnered higher sales tax revenues from online purchases.
Nevertheless, because of the overall positive financial environment, budget officials in many states are reluctant to expand general or excise sales tax bases to include more goods or services, the report authors said. But states are more open to expanding specific excise taxes, such as legalization and taxation of recreational marijuana and taxation of e-cigarettes.
Although many states fared well last year, the center concluded that all states face uncertainties, including changes in consumer behavior, such as the soaring rise in online shopping, and whether those shifts will be permanent. Another pressing question for many states is when their tourism and entertainment sectors will fully rebound.
Moreover, budget officials surveyed expressed concerns over their states’ fiscal situation once federal aid expires.
The Urban-Brookings Tax Policy Center surveyed budget officials this spring about their states’ 2020 fiscal year revenues and future revenue projections to measure how states fared through the pandemic and economic recovery. The center noted that the survey was not answered by every state, only 44 total of them.
For more information about the survey click here.
Jean Dimeo is managing editor of Route Fifty.