State taxes were upended in the aftermath of the COVID-19 pandemic as governments shut down large parts of the economy. While overall state tax revenues have fared better than expected since then, state leaders have been closely examining existing tax policies and considering changes in the wake of the pandemic to adjust to the new fiscal and business environment.
We surveyed state budget officials to understand the fiscal situation in each state and fiscal policies under consideration. The survey findings confirm that the impact of the downturn varied significantly across states depending on their economy, tax structures, and government actions. Revenue drops were mitigated due to strong income taxes, as well as sales taxes that were bolstered by states' expanded authority to collect taxes on on-line sales. The survey results indicate that because of how sales taxes are remitted, many states cannot differentiate between different types of sales to monitor for changes in spending patterns for retailers that have a physical presence within a state. In addition, state officials remain concerned about the longer-term fiscal picture because of the uncertainty related to federal policy actions and post-pandemic consumer and business behavior.