Since the COVID-19 pandemic, state revenues have grown more volatile, driven by shifts in economic activity, federal aid, and tax policy changes. Current federal actions—including potential spending cuts, trade and workforce policies, and new provisions in the One Big Beautiful Bill Act—are expected to further heighten this volatility.

Trends in Tax Revenue

State tax revenue data from the first quarter of 2025 and the first three quarters of fiscal year 2025 (July 2024–March 2025) point to a mixed fiscal landscape. Some revenue streams posted gains, but overall patterns highlight persistent challenges and wide variation across states. Key tax revenue trends in the first three quarters of fiscal year 2025 include the following:

• Personal income taxes: Collections posted solid gains in the median state at 6.6 percent, largely driven by a strong stock market. However, states that recently cut income tax rates are reporting declines in withholding, and revenues remain volatile, especially in states reliant on high-income earners.
• Corporate income taxes: Revenues fell sharply in the median state, down 6.0 percent, reflecting weakened corporate profits and recent state tax policy changes.
• Sales taxes: Collections remained weak for the second year. Year-over-year growth in the median state was just 1.8 percent in nominal terms, reflecting subdued consumer spending and economic uncertainty.

What We’re Focusing On

This quarter, the report includes a special focus on the latest comprehensive state revenue forecasts for fiscal year 2026. The projections—covering personal income taxes, corporate income taxes, sales taxes, and overall tax collections—point to a continued slowdown in revenue growth. These forecasts provide useful insight into how economic trends and recent state policy changes are expected to shape revenues. However, like all projections, they remain subject to revision as new data come in, economic conditions shift, and potential changes in federal policy further alter state revenue outlooks.

What to Expect in the Future

States face growing fiscal unease after several years of broad tax cuts and pandemic-era relief. The slowdown is happening outside of a recession, but warning signs are building. And federal uncertainties—like potential federal funding cuts, tariff-driven inflation, and a shrinking federal workforce—are adding to the fiscal pressure.

Looking ahead to fiscal 2026, many states have already revised revenue forecasts downward. The outlook: tighter budgets, shrinking reserves, and rising long-term obligations. In this constrained environment, policymakers will need to tighten their belts. That means budgeting with recurring revenues in mind, protecting core services, preparing for risks like Medicaid cost growth, and adopting strategies resilient to economic stress.