State Tax Revenue Stabilizes Amid Rising Fiscal Uncertainty

After five years of widespread volatility, state tax revenue growth fell more in line with historical norms in fiscal year 2025. Even so, collections remained sluggish, trailing their long-term trends nationally and in most states for the second consecutive year, suggesting that revenue has settled into a weaker post-COVID-19 pandemic pattern of steady but below-trend growth.

Preliminary data from the first half of fiscal 2026 reinforces this conclusion. Quarterly collections through the third quarter of 2025 and monthly data through December show that inflation-adjusted tax revenue grew modestly and that the number of states collecting below their long-term trends remained largely unchanged.

Nationally, inflation-adjusted tax revenue rose 2.2% in fiscal 2025 compared with the previous year, with about half of states recording gains. This modest growth marked an improvement from fiscal 2024, when 40 states experienced declines but overall collections rose slightly in large part because of a temporary increase in California. Those results came after a sharp contraction in 2023, when 50-state revenue fell 9% and 38 states recorded year-over-year losses.

Despite the return to modest growth, stabilization does not necessarily signal improved budget conditions. By the close of fiscal 2025, total state tax revenue was 2.3% below its 15-year trend, after adjusting for inflation and smoothing for seasonal fluctuations. Forty states were underperforming their 15-year trajectories as they entered fiscal 2026, meaning they have fewer resources than they did in recent years to fund tax cuts, expand public services, prepare for a recession, or pursue other priorities.

This revenue picture reflects a major shift since early 2022 when collections were 15% above trend, the highest in at least 15 years. Over the ensuing two years, the number of states underperforming long-term trends steadily rose: No state had tax revenue below its 15-year trend to start fiscal 2023, but by the end of that year, the number of states below trend had jumped to 15, and it reached 39 a year later.

By the end of fiscal 2025, this sustained underperformance, driven by widespread revenue declines in fiscal 2023 and fiscal 2024—a first outside of a recession in at least 40 years—marked a clear departure from the unusually strong revenue environment of fiscal 2021 and fiscal 2022. Although the scale of these declines resembled past economic downturns, this slowdown happened not because of recession but rather because of the waning of temporary pandemic factors and the implementation of tax cuts in many states.

The number of states performing below their long-term revenue trends held steady in fiscal 2025, suggesting that growth in most states had settled into a more stable—though still below trend—post-pandemic pattern. Early fiscal 2026 data suggests that this has largely continued, with revenue growing steadily but failing to regain lost ground relative to long-term trends.

Strengthen State Government Fiscal 50: State Trends and Analysis

Data Visualization

Most states, having anticipated the decline from pandemic-era highs and the stagnation that followed, were able to maintain relatively strong fiscal positions as they entered fiscal 2026. However, policymakers still face the most pervasive budget pressures since at least 2020 as continued revenue stagnation makes budgeting more difficult and commitments made during the pandemic-era revenue wave—such as broad-based tax cuts and across-the-board wage increases for public employees—now pose fiscal challenges. As a result, many states are reporting that their budgets are structurally imbalanced, with insufficient recurring revenue to support recurring expenditures.

At the same time, federal policy actions are adding another layer of risk. The passage of the budget reconciliation measure, H.R. 1, established a new federal-state fiscal dynamic that state policymakers are still working to understand. The law’s tax code changes are presenting immediate challenges in many states and, in some cases, creating or exacerbating projected budget gaps. Additionally, proposed and enacted measures—such as changes to Medicaid and the federal Supplemental Nutrition Assistance Program, increases in tariffs, shifts in immigration policy, and reductions to the federal workforce—could further disrupt state budgets.

Revenue trends continue to vary widely across the states, reflecting differences in tax structures, policy choices, and economic composition. In states that rely more heavily on personal income taxes, collections are more closely tied to labor market conditions and stock market performance, while in those more dependent on sales taxes, revenue is more sensitive to shifts in consumer spending. Policy actions and tax changes also continue to add volatility.

In fiscal 2025, collections ranged from year-over-year increases of 22.1% in Oregon and 9.8% in Vermont to declines of 12.5% in Nebraska and 8.6% in Alaska. Oregon’s gains were driven, in part, by a rebound from earlier declines linked to the payout of the state’s kicker rebate in fiscal 2024. Vermont benefited from strong personal income and property tax gains, a notable boost given its substantial reliance on statewide property taxes. At the other end of the spectrum, Nebraska’s tax revenue fell in part because of a recent change in how the state taxes certain business income, while lower oil prices were one key driver of revenue declines in Alaska.

State highlights

A comparison of tax revenue in the second quarter of 2025 (the end of the budget year for most states) versus each state’s 15-year trend levels, adjusted for inflation and seasonality, shows that:

• The states with the weakest tax revenue compared with their long-term trends were Iowa (13.4% below trend), Nebraska (11.8% below), and Arkansas (8.4% below). Iowa, Nebraska, and Arkansas all recently implemented significant tax cuts, which lowered collections.
• 10 states bucked the national trend and remained above their 15-year trajectories: Alaska (161.6% above trend), New Mexico (6.8%), Vermont (5.8%), Wyoming (4.4%), North Dakota (3.3%), South Carolina (2.2%), New York (1.6%), Oregon (1.6%), Nevada (0.6%), and Maine (0.3%). Alaska, New Mexico, Wyoming, and North Dakota benefited from a boost in severance tax revenue related to elevated energy prices and production, though their collections have declined in recent quarters from relatively high baselines.
• The number of states performing below their long-term revenue trends fell from 43 in the fourth quarter of 2025 to 40 in the second quarter of that year, with four states (Maine, Nevada, North Dakota, and Oregon) climbing back above their long-term trajectories, while one state, Rhode Island, fell back below trend.

Trends by tax type

Nationally, approximately 75% of total state tax revenue comes via levies on personal income, general sales of goods and services, and corporate income. During the second quarter of 2025, corporate income taxes outperformed their 15-year growth trends, while general sales taxes and personal income taxes fell short.

• For the 44 states that impose a personal income tax, those collections were 7.2%, or $10.7 billion, below their 15-year trend as of the second quarter of 2025, after adjusting for inflation and seasonality.
  • Of the 41 states that collect broad-based personal income taxes:
    • 33 had collections that underperformed long-term trends, ranging from 31.6% below trend in Nebraska and 21.9% below in Iowa to less than 1% below in Ohio and Indiana.
    • Personal income tax revenue outperformed its long-term trend in Oklahoma (3.5%), Maine (3.4%), Massachusetts (3.4%), Delaware (2.4%), Illinois (2.2%), Connecticut (2.1%), North Dakota (1.8%), and Vermont (1.2%).
  • New Hampshire taxes only specific personal dividend and interest income. Tennessee had a tax similar to New Hampshire’s until fiscal 2020, but that tax was fully phased out on Jan. 1, 2021, although the state still reports some lingering collections. In 2021, Washington adopted its own limited tax on capital gains that became effective Jan. 1, 2022. Although the levy is not technically an income tax, the revenue is reported as such to the U.S. Census Bureau and so is included in Pew’s counts.
• Corporate income tax collections were 2.7%, or $954 million, above their 15-year trend as of the second quarter of 2025. Historically, corporate income taxes are one of the most volatile major state tax types. Of the 46 states that impose this tax type:
  • 25 had collections that outperformed long-term trends, ranging from 151.2% above trend in Alaska to less than 0.1% above in Idaho.
  • Corporate income tax revenue underperformed its long-term trend in 21 states, ranging from 31.6% below trend in Mississippi to 0.7% below in Georgia and Montana.
• General sales tax collections were 2.3%, or $2.8 billion, below their 15-year trend as of the second quarter of 2025. Of the 45 states that impose this tax type:
  • General sales tax revenue underperformed its long-term trend in 35 states, ranging from 11.2% below trend in Oklahoma to 0.2% below in New York and Utah.
  • Sales tax revenue outperformed its long-term trends in New Mexico (4.5%), Wyoming (3.2%), South Carolina (2.1%), Georgia (1.9%), Missouri (1.4%), Arizona (1.4%), Nebraska (0.8%), Hawaii (0.4%), Texas (0.2%), and Michigan (0.2%).

Recent developments

Overall, 50-state inflation-adjusted tax revenue rose 4.1% in fiscal 2025 compared with the same period a year earlier, with 32 states reporting gains—the most since revenue began to fall from their mid-2022 highs.

In the second quarter of 2025, changes to states’ collections compared with the same period a year earlier varied widely, ranging from increases of 49.8% in Oregon and 24.3% in New Hampshire to declines of 7.9% in Alaska and 7.8% in Rhode Island. Overall, 18 states posted year-over-year declines, which is in line with historical averages.

According to the National Association of State Budget Officers (NASBO), 34 states ended fiscal 2025 ahead of initial tax collection estimates, with total general fund revenue coming slightly higher than the anticipated 1.9% annual increase. This was the third consecutive year where tax revenue beat forecasts, resulting in surpluses despite sluggish growth.

Despite a relatively strong end to the fiscal year, budget conditions are still tightening. Preliminary data from the Urban Institute shows that total inflation-adjusted tax revenue remains stagnant in fiscal 2026. During the first six months of this fiscal year, 41 states reported nominal increases compared with the same period a year earlier, but that drops to 26 states after accounting for inflation. This highlights one way that collections are not keeping pace with rising costs and broadly tracks with states’ overall projected 0.7% nominal increase for the year.

Although actual collections are stabilizing and aligning more closely with estimates, states have less money than they did during the height of the pandemic in fiscal 2021 and fiscal 2022. Projected budget deficits are becoming more common, especially when revenue and spending are forecast beyond the current fiscal year, and states are increasingly turning to cost-saving measures, such as targeted spending cuts, hiring freezes, and drawdowns from reserves to make up the shortfalls.

One key question facing states is whether they can still afford the long-term budgetary commitments they made during the pandemic-era revenue surge—such as tax relief and pay raises for public employees. For instance, according to NASBO, fiscal 2023 and 2024 saw the largest net state tax cuts ever recorded (by dollar amount), ranging from targeted, temporary rebates to permanent, broad-based rate reductions. At the same time, lawmakers in 40 states approved across-the-board wage increases of 2% to 12% for state employees in fiscal 2024, up from the 37 states that raised wages in fiscal 2023 and the 25 states that did so in fiscal 2022.

Further, although recent data suggests greater revenue stability, a range of federal policy changes have also caused the fiscal outlook to become more uncertain. Higher tariffs can raise prices and operating costs, discouraging consumer spending and straining businesses, particularly in manufacturing and retail. Shifts in immigration policy may reduce the labor supply for immigrant-dependent sectors, such as agriculture, construction, and hospitality. Cuts in the federal workforce could lower incomes and curb consumer spending in states with large concentrations of federal employees. Changes in tax policy—such as personal deductions and business spending provisions—are already affecting state revenue. And reductions to federal grants—especially Medicaid, the largest source of federal funding to states—could pose a substantial risk to state budgets and services.

Changes in federal policy have also led several states to lower their revenue outlooks. Arizona and New Mexico, for instance, each estimate that conforming to the changes made in H.R. 1 will lead to at least $100 million in general fund losses across multiple upcoming fiscal years. And Michigan officials reduced their revenue projections by $320 million for fiscal 2026 after forecasting weaker economic conditions, including the potential loss of about 3,300 automotive sector jobs over the next three to five years because of tariff-related cost pressures. At least 22 other states also have adjusted their revenue forecasts downward amid growing uncertainty.

Two fiscal management tools can help states better evaluate their exposure to federal policy shifts and the long-term affordability of pandemic-era budget commitments:

• Long-term budget assessments help policymakers identify challenges that can build over time.
• Budget stress tests help leaders assess how different economic scenarios would affect their budgets and how much to set aside in their rainy day funds.

Changes since the pandemic’s onset

The start of the COVID-19 pandemic in early 2020 abruptly ended a nearly continual stretch of annual growth since 2010 when state tax revenue began recovering from the Great Recession. Aggregate state tax revenue from April through June 2020 was an extraordinary 25.4% lower than in the same quarter of 2019—the steepest single-quarter plunge in at least 25 years.

But much of the sudden shortfall resulted from the federal government’s decision—copied by nearly all states—to delay that year’s income tax filing deadline until July 15, which pushed large sums of personal and corporate income tax payments into the first quarter of fiscal 2021 and aggravated the strain on many states’ fiscal 2020 budgets. In the face of tremendous uncertainty, states forecasted multiyear revenue declines comparable to or more severe than those experienced as a result of the 2007-09 recession. But as the pandemic progressed, national tax revenue rebounded swiftly by historical standards—recovering about five times faster than it did after the 2007-09 recession.

Tax collections continued to exceed expectations in budget years 2021 and 2022, posting the highest and second-highest annual growth rates of the past 25 years, respectively, and bringing state tax revenue to record highs, while historic rainy day fund balances and federal aid to state governments gave state budgets extra breathing room.

Of the various factors that contributed to these higher-than-expected collections, unprecedented federal aid to businesses and unemployed workers, a shift in consumer spending patterns from purchases of often-untaxed services to typically taxable goods, and widespread conservative revenue forecasts were the primary catalysts. States’ relatively recent authority to collect sales taxes from out-of-state online sellers, quicker-than-anticipated recoveries in the stock market and employment, and job stability in higher-wage professions that were able to pivot to remote work also played a significant role.

Natural resource-dependent states—such as Alaska, North Dakota, and Wyoming—and those reliant on tourism—such as Hawaii and Nevada—had some of the deepest and longest-running declines in tax revenue. Reduced travel in the early stages of the pandemic hurt businesses and jobs in the leisure and hospitality industries and lowered demand for fuel, further depressing tax revenue in energy states that were already coping with pre-pandemic declines in oil and gas prices. Starting in the second half of 2021, however, rising energy prices and increasing tourism boosted these states’ recoveries.

The years of momentous tax revenue growth came to an end in fiscal 2023, when inflation-adjusted tax revenue fell compared with the prior year—the only time in at least 40 years that real annual tax revenue has declined outside of a recession. Tax revenue fell again in most states in fiscal 2024, marking the first time in at least 50 years that states experienced back-to-back real annual declines unrelated to an economic downturn.

Why Pew assesses state tax revenue trends

Tax revenue serves as the primary source of funding for most states. By tracking tax revenue trends, Pew provides policymakers and analysts with insights into the long-term financial health of their states, because revenue directly affects states’ capacity to provide residents with core public services—such as education, health care, and infrastructure—and to fund other policy priorities.

Understanding long-term trends can also help state leaders judge whether their budgets are on a sustainable path and can support better-informed fiscal planning and policy formulation. Policymakers should assess the factors behind tax revenue deviations from long-term trends—overall and for particular revenue streams—to understand whether revenue variations stem from policy changes, external factors beyond their immediate control—such as demographic shifts—or both. And to help ensure their state’s long-term fiscal sustainability, lawmakers should also examine whether these deviations are the result of one-time or temporary factors or whether they represent a more structural change that is likely to persist without policy action.

Justin Theal is a senior officer and Alexandre Fall is a principal associate with The Pew Charitable Trusts’ Fiscal 50 project.