Pew: Tax revenue most volatile in 29 states, less volatile in 21

(The Center Square) – State shutdowns resulting from executive orders issued by governors and judges resulted in 40 million job lost nationwide, lost revenue for states, and now “sharp, unpredictable swings in tax collections,” according to a new analysis on the fiscal health of states by Pew Charitable Trusts.

Revenue volatility is “confounding state lawmakers’ efforts to balance budgets,” Barb Rosewicz, project director of State Fiscal Health at Pew, writes in the report.

Revenue volatility is determined by the total tax collections and major tax sources by state and was calculated by Pew over a 20-year period. Volatility differs across states and fluctuates every year.

Between fiscal years 2000 and 2019, severance taxes on oil and minerals and corporate income taxes were consistently more volatile than other major state taxes like personal income taxes and sales of goods and services, the report found.

Although policy makers can raise or lower tax revenue to fill budget holes, many factors like natural disasters or the coronavirus fall outside of their control. Economic factors that impact revenue volatility include a mix of industry, natural resources, workforce, and population growth, in addition to changes at the federal level regarding budgeting and taxation, the report notes.

All areas of revenue were impacted in all 50 states by economic losses caused by the coronavirus, the report states. Examples range from personal income taxes on wages and investment earnings, which were offset by massive unemployment filings, to general sales tax revenue, which plummeted because restaurants, bars, retail stores, and other businesses were forced to close.

The report calculated a volatility score for the underlying trends in each state’s overall tax revenue and major taxes, which account for at least 5 percent of each state’s tax revenue on average over the last 10 years.

The scores measure the variation in year-over-year percent changes between fiscal 2000 and 2019, with lower scores indicating that revenue levels were similar from year to year, and higher scores indicating revenue growth declined more dramatically. Overall, the total tax revenue across the states fluctuated by 4.96 percent above or below its overall growth trend.

Tax revenue was more volatile than the national benchmark in 29 states.

The highest volatility occurred in Alaska, North Dakota, and Wyoming – all natural resource-dependent economies that rely heavily on severance tax revenue.

New Mexico’s and Utah’s revenue volatility was among the highest. The volatitlity was caused by an upswing in severance and sales taxes in New Mexico and increases in personal income and sales taxes in Utah.

In the three states with the highest overall scores – energy-rich Alaska, North Dakota, and Wyoming – the greatest share of tax dollars over the last 10 years came from highly volatile severance taxes.

Severance taxes are highly dependent on global energy prices. It was the most volatile revenue source in eight of the nine states where it brought in enough revenue over the last decade to be considered a major tax, the report notes.

By contrast, in Texas, the largest oil producer in the U.S., which ranked near the middle of states for overall revenue volatility, fared better than Alaska even though its severance tax revenue was the second-most volatile behind Alaska’s.

“The crucial difference is that severance tax accounted for 7.5 percent of Texas’ total tax collections over the past decade,” the report states, “compared with 62.3 percent of tax revenue in Alaska, 45.7 percent in North Dakota, and 35.6 percent in Wyoming.”

Tax revenue was less volatile in 21 states. The least volatile was South Dakota, followed by Arkansas and Kentucky. All three relied on stable tax streams for more than half of their respective revenues. South Dakota relies on sales tax; Arkansas and Kentucky rely on sales and personal income taxes.

By Bethany Blankley | The Center Square
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Reposted with permission

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