While state budgets are recovering along with the US economy, state fiscal policymakers remain cautious about the post COVID-19 future, according to a survey by  the Tax Policy Center, with the support of Avalara. Officials in 44 states responded to the TPC survey, which was aimed at learning about the impact of the pandemic on state budgets, the state tax revenue picture, the budget outlook for FY 2022, and their views about sales tax reforms. Overall, while state budget officials are increasingly optimistic, they remain concerned about what might be called long-term fiscal covid.  

When the pandemic spread in 2020,  states saw a freefall in revenues. Many rushed to revise their budgets for FY 2021 in light of dire forecasts. But, while revenues plummeted from April-June 2020, they mostly recovered in the next quarter. For the period April 2020 to March 2021, overall state revenues ended up fairly flat compared to the prior year.

We surveyed officials largely before Congress passed the American Rescue Plan Act (ARPA) in March. Here are some of the key takeaways:

• Most states were unable to fully assess the impact of the pandemic on their budgets.
  • This was in part due to shifting income tax deadlines.
• Most states ended up with higher revenues than they initially feared.
  • Income tax revenues remained fairly strong because higher-income households were less impacted by the pandemic.
  • While consumption of services plunged, sales tax revenues were robust thanks to growth in taxable goods purchases, including online sales that states recently gained authority to tax. However, many states have incomplete details on whether purchases are made on-line or in-person  
• Because of the current positive fiscal environment, most states are not planning to expand general tax bases to include more goods or services.
• Taxation of digital goods and streaming services still is not widespread across the states despite growth of the digital economy. And very few states are planning to expand state sales taxes to those transactions.

Most states responding to the survey expressed optimism about their budgets and economies in fiscal year 2022. The passage of the ARPA, which provides $195 billion in direct aid to states,  made state fiscal pictures even brighter. But many respondents remained concerned about the future.

These challenges include uncertainty about:

• How state revenues will perform in the post-pandemic world and after federal relief runs out;
• Changes in consumer behavior caused by the pandemic and whether trends such as dramatic increases in on-line purchasing will continue;
• If and when tourism and services such as hotels, car rentals, restaurants, bars, and entertainment will revive and related taxes will recover;
• Whether industry composition within their state would change permanently; 
• Whether elected officials will address structural budget deficits (the gap between revenue growth and spending growth);
• Aging populations and growing public pension obligations and other postemployment benefits; and
• A lack of alignment among policymakers regarding long-term fiscal solutions.

While most state officials are hopeful that large pandemic-related challenges are behind us, the situation remains fluid, and states continue to face considerable uncertainty. Indeed, while people are traveling more and hard-hit industries are recovering, new COVID-19 cases are increasing. We will continue to monitor what is happening in states, but our survey gave us deeper insight into how state officials understood the fiscal consequences of the pandemic so far.

To dig deeper into the survey results, read the full report “Surveying State Leaders on the State of State Taxes.”