State and local tax revenues posted modest growth during the first half of fiscal year 2026. Overall, gains were driven by strong personal income tax collections concentrated in a few states with progressive tax structures and high reliance on high-income taxpayers, where growth was closely tied to strong stock market performance and elevated capital gains realizations. However, these gains masked a broader pattern of uneven and generally subdued revenue growth across states, with many states seeing little or no growth.
States continue to face mounting uncertainty from both economic and policy developments, including elevated oil prices associated with geopolitical tensions, renewed inflationary pressures, and ongoing federal policy uncertainty.
Trends in Tax Revenue
State tax revenue data for the fourth quarter of 2025 show notable variation across states and tax types. Key year-over-year trends include the following:
- State total taxes: Collections increased 3.7 percent in the median state in nominal terms, but growth varied widely across states, with 10 states reporting declines.
- Personal income taxes: Collections grew 6.9 percent in the median state, supported largely by strong stock market performance. However, revenue volatility persists, and several states that recently enacted income tax rate cuts are reporting slower withholding growth or outright declines in withholding collections.
- Corporate income taxes: Revenues declined 14.3 percent in the median state, reflecting both weaker corporate profits and recent policy changes that reduced liabilities. Declines were widespread across the states.
- Sales taxes: Collections remained moderate, with year-over-year growth of 4.5 percent in the median state in nominal terms, supported in part by holiday-related consumer spending in late 2025. However, overall sales tax growth remained below historical trends in many states, reflecting a softer consumer spending environment.
What We’re Focusing On
This quarter’s report includes a special focus on the latest comprehensive state revenue forecasts for fiscal year 2027. The projections—covering personal income, corporate income, sales, and overall tax collections—generally point to continued moderation in revenue growth and a more constrained fiscal environment for many states. Although personal income tax collections remain strong in some states, most forecasts anticipate slower growth across major tax sources compared with recent years. These forecasts provide important insight into how states expect economic and policy conditions to shape revenues in fiscal year 2027, though projections remain subject to revision as conditions evolve.
What to Expect in the Future
Looking ahead, states are likely to face a more challenging and uncertain fiscal environment. The outlook is further complicated by renewed inflationary pressures, elevated energy prices associated with geopolitical tensions, slowing consumer spending growth, federal workforce reductions, uncertainty surrounding federal fiscal policy and intergovernmental aid, and the fiscal effects of recently enacted state tax cuts.
As a result, many states may face tighter budgets and more difficult tradeoffs in the years ahead.
