Twenty-five states are expected to exceed their forecasted revenues for the 2022 fiscal year, with another seventeen states expected to meet their current general fund revenue projections.
That was according to a recent survey of legislative fiscal offices conducted by the National Conference of State Legislatures in December and January. Many of those budgetary estimates were revised upward since the beginning of the year.
“This is a survey we do midway through every fiscal year to touch base with states and see how general fund revenues are performing,” said Erica MacKellar, program principal, fiscal affairs program at the NCSL. “No state that has returned the survey has reported that they're unlikely to meet their revenue estimates by the end of fiscal year 2022,” she added. “That's a lot different than where we thought we'd be at the start of the pandemic.”
COVID-19 caused massive drops in state revenue beginning in 2020, particularly for those states that rely heavily on oil and gas taxes and tourism. But those states have rebounded since the start of the pandemic, with many of those states such as Alaska, New Mexico, North Dakota, Oklahoma, Nevada and Wyoming expecting revenues above initial projections, the NCSL said.
Some of these states' economic concerns have been quelled by a slow return to normalcy and federal aid from The Infrastructure Investment and Jobs Act as well as the American Rescue Plan. These have helped states add additional boosters to their revenue expectations.
“State fiscal conditions have rebounded since the start of the pandemic,” the NCSL said. “Many states are reporting revenue surpluses and rebounding economies, in part as a result of federal aid to state governments.”
Personal income taxes, the largest share of state tax collections and the most important revenue source for many states, are expected to be slightly higher than initially anticipated at the beginning of FY 2022.
Half of states expect personal income taxes to exceed initial projections and several others have already revised their projections upwards, the NCSL said. Personal income taxes are expected to meet projections in Arizona, Hawaii, Maine, Maryland and Wisconsin, with Arkansas forecasting a $63.1 million drop. Despite that the state is still likely to exceed revenue expectations.
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not collect personal income taxes and Alaska, Delaware, Montana, New Hampshire and Oregon don’t collect a state sales tax, which often accounts for the second largest portion of state revenues.
“General sales tax collections are expected to exceed estimates in over half of states and are on target in at least another six states, including Arkansas, Hawaii, Maine, Maryland, Washington and Wisconsin,” the NCSL said. “While consumer demands for goods and services has been driving general sales tax revenue growth, some states noted that inflation may also be contributing to higher than anticipated revenue collections.”
Corporate income tax also represents a significant portion of revenues in many states, though these taxes have historically been more volatile than income or sales tax, NCSL said.
Twenty states are above initial revenue estimates for corporate income tax collections, with five others expected to meet their projections. New Mexico and Maryland have revised their estimates downwards, with the former not expecting to meet its revised target, while the latter is.
For those states that levy a severance tax, collections are generally strong, despite being below estimates in Kentucky and being revised downwards in Alabama “due to a leveling of oil and gas prices,” the NCSL said.
“In the near term, the fiscal situation in most states across the country is strong. Legislative fiscal directors describe revenue surpluses and growing rainy day fund reserves,” the NCSL said.
This is leading some states to consider permanent tax reductions, the NCSL said, which could set states up for problems in the years to come.
“Over the long-term, there is less certainty about the strength of state fiscal conditions. The one-time nature of federal funds potentially sets states up to face a fiscal cliff as federal funding runs out, but projects and programs with federal aid continue,” the NCSL concluded.
“There is some cautious optimism that growth will continue,” MacKellar said. “But there are a lot of external factors.”
