Total state government tax revenue collections declined 12.8 percent in nominal terms and 15.7 percent in real terms in the second quarter of 2023 relative to a year earlier. The inflation-adjusted growth rates differed significantly across key revenue sources in the second quarter of 2023. Personal income tax revenues declined 30.1 percent, corporate income tax revenues declined 13.8 percent, sales tax revenues decreased 1.5 percent, and motor fuel tax collections increased 4.4 percent compared to the same period a year earlier.

Preliminary data show year-over-year further declines in nationwide state tax revenue collections in the third quarter of 2023, marking the fourth quarterly decline in nominal terms. However, this decline has significantly eased. Nominal state tax revenue collections declined by 1.2 percent in the third quarter of 2023 compared with the same period in 2022, primarily due to declines in personal income tax revenues. The declines in personal income tax revenues were expected given a weaker stock market and state policy actions that included tax rate cuts and rebate payments.

States’ fiscal path forward remains highly uncertain, particularly for states that enacted permanent tax rate cuts. Large rainy-day funds could help ease the transition to slower revenue growth. However, if the economy falters and if revenue collections continue to deteriorate, states will be forced to grapple with the need for more revenue or spending cuts in the coming years.