States Grappling With Hit to Tax Collections

NOTE: We are no longer updating this report. See Table 2 for date of last forecast reported for each state.

"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. State revenues have declined precipitously and costs are rising sharply, with many businesses closed or operating at reduced hours and millions of people recently unemployed. Due to the economy’s rapid decline and uncertainty about its future path as well as possible federal aid, official state revenue projections likely do not yet fully reflect the unprecedented fiscal impact of the coronavirus pandemic. Executive and legislative fiscal offices in many states are analyzing new economic projections and producing estimates of the damage before state legislatures meet in regular or special sessions to address shortfalls. Most states have released estimates but they may change before state legislatures meet again later this year or in January. (See Table 1.)

Estimates Show Substantial Shortfalls

States’ revenue projections show some of the damage the pandemic-induced downturn has caused 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 general fund revenue impacts reflects the uncertainty that states face, and the variety of methods states are using to assess the damage. (In some cases, states are still relying on data available before the crisis.)

States have begun the 2021 fiscal year that extends from July 2020 to June 2021 in most states. State revenue estimators are likely proceeding cautiously with these 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.

There is considerable uncertainty about the course of the economy over the next year. For example, if the federal government fails to provide additional fiscal stimulus, the chance that the economy could turn down again rises and another resurgence of the virus would dampen growth. 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 as the pandemic took a toll on revenues. State tax collections for March through August 2020 were 6.4 percent less than in the same months of 2019, on average. In normal times, tax collections would have grown from 2 to 3 percent. 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. The federal fiscal aid provided so far and the fact that high-wage earners were more likely to keep their jobs than low-wage workers, combined with the stock market remaining at high levels, has meant that revenues did not fall quite as much as anticipated in some states. But states still face large budget shortfalls and uncertainty as COVID-19 cases continue to climb and much federal assistance to workers and businesses has ended and may not be extended.

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 enacted $413 million in emergency spending cuts 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 for fiscal year 2021. 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 most current estimated revenue declines we’re aware of in the table below. In many cases these are estimates that states will update as more is known about the impact of the COVID-19 pandemic on the economy and tax collections.