April revenue collections set records in Southwest states as a strong economy and elevated inflation boosted income and sales tax collections, although some officials are urging caution as uncertainty clouds the coming months.
Texas, Oklahoma, and Arkansas reported all-time high collections as states begin to announce their April revenue performance.
Everything is going right for state coffers, according to Mark Zandi, chief economist at Moody’s Analytics.
“The job market is strong, which is supporting income tax revenues, consumer spending is robust, fueling sales tax revenues, corporate earnings are soaring, powering corporate taxes, and house prices are surging, juicing-up property tax revenues,” he said. “Of course, high inflation is also a strong tailwind to revenue growth.”
Zandi cautioned that revenue growth will lose some steam going forward as the Federal Reserve works to slow economic growth and contain inflation, which increased 8.5% in the 12 months through March, its largest gain since December 1981.
“Recession risks are also on the rise. This is the time for state and local government officials to build up their rainy day funds,” he said.
April is usually the biggest revenue month for states that tax personal income and last month marked the first time since 2019 those returns were due in April. The COVID-19 pandemic led the U.S. Internal Revenue Service to delay its April 15 tax filing deadline in 2020 and 2021, with states following suit.
Oklahoma’s gross receipts topped $2 billion for the first time in any month, propelled by personal and corporate income taxes, which generated $1.1 billion.
“Record performance numbers point to the strength of the state economy,” State Treasurer Randy McDaniel said in a statement. “Even so, there are signs that would urge some caution going forward."
He pointed out sales and use tax receipts are up by less than the rate of inflation at 2.9%, and gross production and motor vehicle revenues are lower than April 2021 collections.
Still, gross revenue from oil and natural gas production hit a
Texas, which does not tax personal income, reported its biggest April ever for sales taxes, its largest state revenue source, with $3.83 billion collected, up 12.8% from April 2021.
“State sales tax collections reached a new high for the month of April, with double-digit growth reflecting both inflation and continued expansion in real economic activity and employment,” Texas Comptroller Glenn Hegar said in a statement.
Some of the state’s other taxes recorded their highest monthly collections on record — $666 million from the oil production tax, $76 million from the hotel occupancy tax, and $152 million from alcoholic beverage taxes.
With four months left in the state’s fiscal year, oil production tax revenue has surpassed total fiscal 2021 collections by 9.7% at $3.78 billion. Fiscal year-to-date sales tax revenue, at $28 billion, was up 22.3% compared to the same period a year ago.
April also brought Arkansas its largest monthly net revenue inflow in the state’s history, topping the $1 billion mark for the first time at $1.125 billion, which was $532 million over the economic forecast for the month.
At $810.8 million, personal income tax revenue was nearly double the forecast for the month. With two months until fiscal 2022 ends, general fund revenue is already nearly $1 billion above forecast.
Governor Asa Hutchinson said a booming economy and higher consumer goods prices have boosted revenue, but warned of “significant uncertainty” about the national economic outlook.
“The taxpayers need and deserve at least a portion of the surplus to be returned to them because the state should not be generating this large of a surplus,” he said in a statement, adding that the state needs to be cautious as it looks at options for the surplus.
Records will likely be set in other states as well, according to Justin Theal, an officer with the state fiscal health project at The Pew Charitable Trusts.
Outside of the Southwest region, Illinois’ general funds revenue of $8.037 billion in April was the highest base revenue total in any month in the state’s history and was driven by a record month for income tax collections, according to a legislative agency report.
The revenue rise has sparked tax cuts in several states, Theal said.
“Whenever there are good budget years, policymakers definitely feel the pressure to give some of that fiscal excess back to the taxpayer” or boost spending or expand certain programs, he said.
About a third of states are pursuing “notable general fund tax reforms this legislative session,” S&P Global Ratings reported last month.
With April tax revenue of $1.51 billion surpassing recently revised estimates by 13.4%, Democratic Kansas Governor Laura Kelly called for speeding up
“These tax collection receipts reiterate the state’s fiscal health, and clearly shows we can afford to move up the ‘ax the food tax’ implementation date to July 1 of this year,” she said in a statement. “I’m calling on the Kansas Legislature to do so as soon as they come back later this month.”
A bill passed by the Republican-controlled legislature last month reduces the tax to 4% from 6.5% on Jan. 1, 2023, to 2% in 2024, and eliminates it at the beginning of 2025.
Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, said almost all state revenues are exceeding fiscal 2022 projections and in some instances beating upwardly revised estimates.
“Revenue streams have remained very unpredictable and very volatile. It continues to be a challenge predicting state tax revenue because of what we've seen going on both with the economy and the pandemic,” he said, adding that projections are for less growth in fiscal 2023, which begins July 1 for most states.
In its report, S&P said it anticipates states will start fiscal 2023 “with increased budgetary cushion, following recent legislative actions across the country to direct portions of recent surplus revenue collections to rainy-day reserves.”
“While we believe some state budgets are better positioned for slower growth than others, we expect historically high reserve levels built over the past decade will support stability over the upcoming budget cycle,” the rating agency said.
