States Are Seeing Steep Income Tax Revenue Growth. Will It Last?

By Liz Farmer | Senior Contributor

Dec. 1, 2021

This story was originally published on Forbes.com

States collected nearly $455 billion in total income tax revenue in fiscal 2021—an astounding 14.7% increase over the prior year. That’s according to the latest report from the National Association of State Budget Officers (NASBO), which covers spending through June 2021. Over two years, income tax revenue is up 15%.

However, these numbers are highly influenced by unusual economic times. For starters, states delayed their tax filing deadline by several months when the pandemic began. For most, this pushed their 2020 income tax revenue into the next fiscal year. This artificially deflated 2020’s numbers while inflating 2021 collections.

The federal stimulus has also played a role. Since March 2020, the feds have doled out $867 billion in cash to households via three Economic Impact Payments. While those payments weren’t taxable, they could indirectly increase state tax liability for some. (The New York TimesNYT has a good explainer on that.) Plus, unemployment insurance — which most states do tax — received a massive boost for about 15 months.

Last, there’s the stock market. The S&P 500 is up more than 40% from a year ago and up nearly 70% from three years ago. Most states tax capital gains at the same rate as ordinary income and those with a high concentration of wealthy individuals (i.e., California) are reaping the tax revenue benefits of the bull market.

Other takeaways from the NASBO report:

  • Total state general fund revenue increased in 2021 by an estimated 12.8%

  • Total state spending in 2021 increased by 16.2%, the highest annual jump in the 35-year history of the State Expenditure Report.

  • Over the past two fiscal years, states spent $427.9 billion in federal COVID-19 aid.

Will It Last?

The income tax boom hasn’t slowed down yet. Between April and September of this year, 37 of the 43 states that tax personal income saw continued growth in that revenue stream, according to the latest analysis from the Urban Institute’s Lucy Dadayan. Eleven of those states saw growth of more than 20%. Utah, for example, is forecasting income tax revenue of $5.7 billion for the current fiscal year. That’s one-third higher than 2019 (not adjusted for inflation).

However budget forecasters do eventually expect income tax revenue growth to slow. Most states are forecasting strong growth for the remainder of the fiscal year but those reports are coming with warning labels about the out years.

For example, Utah’s economic impact report notes that “a decline in personal income seems likely in the national labor market.” The extent will depend on whether the economy is readjusting back to pre-pandemic trends or if another wave of the virus forces a labor labor market contraction.

The Omicron variant of the virus has not been reported in the U.S. but economists are concerned about the potential effects. However, notes NASBO, “high-income earners have been relatively insulated from the COVID-19 pandemic’s economic effects, which has limited impacts on personal income tax collections.”