States Grappling With Hit to Tax Collections

"State revenues are declining precipitously and costs are rising sharply with many businesses closed and tens of millions of people newly unemployed."

COVID-19 has triggered a severe state budget crisis. While the full magnitude of this crisis is not yet clear, state revenues are declining precipitously and costs are rising sharply with many businesses closed and tens of millions of people newly unemployed. Due to the economy’s rapid decline, official state revenue projections generally do not yet fully reflect the unprecedented fiscal impact of the coronavirus pandemic. In many cases, states do not even know how much their revenues have already fallen, in part because they’ve extended deadlines for filing sales and income tax payments that otherwise would have been due in recent months. Executive and legislative fiscal offices in many states are analyzing new economic projections and producing initial estimates of the damage before state legislatures meet in regular or special sessions to address shortfalls. Most states have released initial or preliminary estimates. (See Table 1.)

Early Estimates Show Substantial Shortfalls for 2020, 2021

CBPP estimates that state budget shortfalls will ultimately reach almost 10 percent in the 2020 fiscal year (which ended on June 30 in most states) and over 20 percent in the current fiscal year (2021) based on recent economic projections.

States’ initial revenue projections give a first look at some of the damage the pandemic-induced downturn could cause to state budgets, though they do not show states’ increased costs from fighting the virus and from rising demand for state services. The wide range of projected revenue impacts reflects the uncertainty that states face, and the variety of methods states are using to begin to assess the damage. (In some cases, states are still relying on data available before the crisis.)

Most states have just begun a new fiscal year that will extend through June 2021. State revenue estimators are likely proceeding cautiously with these initial estimates, because of the consequences the revenue declines will have as states work to balance their budgets. Policymakers will want to be more certain about the scale of expected revenue drops before making large and harmful budget cuts. Current economic forecasts strongly suggest, however, that as the full scale of the downturn becomes clearer, revenue projections will fall further. In addition, gas taxes, vehicle registration fees, and other revenues that are deposited into separate funds (like transportation funds) are also declining.

States faced an immediate crisis in fiscal year 2020. The full extent of the 2020 shortfalls won’t be known for a few weeks but the pandemic took a toll on revenues. To balance their budgets — as required — states made cuts, tapped reserves, or found enough revenue to close these shortfalls in just three months, an extremely short period to find such large amounts of revenue. For example, for the fiscal year that just ended:

• Kansas estimated an $816 million drop in revenues.
• Arizona expected revenues to drop by $864 million.
• Arkansas expected $353 million less in revenue, with $193 million due to the income tax filing extension to July 15 and the remainder due to lower collections.

State estimates show that revenues for the current fiscal year, which began on July 1 for most states, could fall as much as or more than they did in the worst year of the Great Recession and remain depressed in following years. New York and Colorado, for example, project revenue drops of 17 percent or more if the recession is deep.

• California expects revenues to decline by $32 billion in 2021 alone, according to the Department of Finance. The revenue declines in fiscal years 2020 and 2021, combined with COVID-19 costs and increased need for other state services, far outstripped the balance in the state’s substantial rainy day fund.
• New York’s tax revenues will fall by $13 billion in 2021 and by $16 billion in 2022, according to the state’s Division of Budget.
• Colorado’s revenues could drop by as much as $2.6 billion in 2021 and $1.7 billion in 2022, according to the Legislative Council.

Another group of states face a double threat. States with a high concentration of oil-related industries are seeing a decline in economic activity and tax collections due to plunging oil prices on top of COVID-19-related effects and the recession. For example, Alaska is projecting an $882 million decline in revenues in the current fiscal year, and New Mexico could see a $2 billion drop.

States are drawing on their rainy day funds and other budget reserves to address these shortfalls but, as in the last recession, those reserves will be far from adequate. And states will worsen the recession if they respond to this fiscal crisis by laying off employees, scaling back government contracts for businesses, and cutting public services and other forms of spending.

Damaging cuts have already begun. In Georgia, policymakers approved a 10 percent cut for 2021, including a nearly $1 billion cut for K-12 public schools and cuts to programs for children and adults with developmental disabilities, among others. Maryland’s governor has proposed nearly $1.5 billion in cuts; some have already taken effect, including large cuts to colleges and universities. Florida’s governor vetoed $1 billion in spending that lawmakers approved before the crisis and ordered agencies to look for 8.5 percent more in possible cuts. The state also cut money for community colleges and services related to behavioral health, including opioid and other substance use treatment services, crisis intervention services, and services for people experiencing homelessness.

Given the economy’s rapid decline and the extraordinary damage being done to state, tribal, and local budgets, federal policymakers will need to provide more help to states and families affected by the crisis.

Tracking Estimated State Revenue Shortfalls

We’ve collected the preliminary estimated revenue declines we’re aware of in the table below. We’ll update this list as states continue to revise their revenue estimates for the upcoming fiscal year. In all cases these are preliminary estimates that will be updated as more is known about the impact of the COVID-19 pandemic on the economy and tax collections.