Revenue Volatility Varies Widely by State and Tax Type

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Tax Type
ANALYSIS

Revenue Volatility Varies Widely by

State and Tax Type
January 08, 2015
States' Fiscal Health

States experienced vastly different tax revenue fluctuations over the past two
decades, with the greatest year-to-year volatility in Alaska and the least in South
Dakota. These swings can confound efforts to balance state budgets. This firstof-its-kind assessment controls for the effect of known state tax law changes to
reveal the underlying volatility of each states total tax revenue and major tax
sources.
Each states overall revenue volatility springs from its unique mix of taxes. From fiscal
year 1995 to 2013, corporate income tax and severance tax on oil and minerals
consistently were more volatile than other major state taxes, such as those on
personal income and sales of goods and services.
Download the data.
States choose what and how much to tax, but the volatility of individual tax streams
is often influenced by factors outside policymakers control. Ups and downs in tax
collections can be attributed to state economic factorssuch as the mix of industry,
natural resources, workforce, and population growthand to federal budget
changes and unforeseen events, such as natural disasters.

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Revenue Volatility Varies Widely by State and Tax Type

http://www.pewtrusts.org/en/research-and-analysis/analysis/201...

By altering tax policy, states can alter year-over-year increases or decreases in tax
revenue. Removing the estimated effect of such policy changes from the calculation
of each states volatility score reveals the underlying revenue trends and provides
useful information for policymakers trying to plan for and manage revenue
uncertainty in state budgets. After controlling for changes to state tax law, this
analysis derives a volatility score for each states overall tax revenue and each of its
major taxesthose that made up at least 5 percent of its tax revenue on average over
the past 10 years. The score measures how much variation there is in year-over-year
percent change between fiscal 1995 and 2013, based on a calculation of standard
deviation. A low score means that revenue was similar from year to year, and a high
one indicates that it grew or shrank more dramatically.

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Revenue Volatility Varies Widely by State and Tax Type

http://www.pewtrusts.org/en/research-and-analysis/analysis/201...

Alaska had the highest overall volatility score34.4 percentmeaning the states
total tax revenue showed wide variability from year to year, typically fluctuating
within 34.4 percent above or below its overall growth trend. The next most volatile
tax revenue streams were in Wyoming (12.1 percent) and in North Dakota and
Vermont (both 11.6 percent).
The states with the lowest volatility were South Dakota (2.6 percent) and Kentucky
(2.9 percent). The majority of states had volatility scores clustered within a range of 3
to 7 percent.
An analysis of each states tax revenue fluctuations from fiscal 1995 to 2013 reveals
that:
Overall, 50-state tax revenue had a volatility score of 5.0 percent. Compared with
this national benchmark, 29 states had higher volatility and 21 had lower.
Three of the four states with the greatest overall volatility received a substantial
share of their tax dollars from severance taxes, which are affected by global
energy prices. In 2013, severance taxes made up 78.3 percent of tax revenue in
Alaska, 39.7 percent in Wyoming, and 46.4 percent in North Dakota.
Among the states with low overall scores, Kentucky collected the bulk of its tax
dollars from some of the least volatile personal income and sales tax streams in
the country, and South Dakota relied primarily on one of the most stable streams
of sales tax revenue.
Corporate income tax revenue seesawed more than any other tax source in 24 of

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Revenue Volatility Varies Widely by State and Tax Type

http://www.pewtrusts.org/en/research-and-analysis/analysis/201...

the 29 states where it was a major tax, and it was more volatile than personal
income tax in all 25 states that collected both as a major tax. Its volatility score
ranged from 59.0 percent in Alaska to 9.3 percent in New Hampshire.
Severance tax was the most volatile revenue source in six of the nine states
where it was a major tax, with volatility scores ranging from 39.7 percent in
Alaska to 15.3 percent in West Virginia.
Personal income tax fluctuated more than any other type of tax in nine of the 41
states that levy it. Volatility scores ranged from 13.4 percent in North Dakota to
3.5 percent in West Virginia.
Sales tax was the most volatile major tax in only three of the 45 states that
impose it: Nevada and Washington, which have no personal income tax, and
Colorado, the only state where sales tax was more volatile than personal income
tax among 38 states that collect both. Volatility scores for sales tax ranged from
a high of 14.9 percent in Wyoming to a low of 2.8 percent in Kentucky.
Although most types of taxes tracked broader economic trends, some followed their
own paths. As financial markets foundered and unemployment surged during the
Great Recession, West Virginia benefited from high coal and natural gas prices and an
increase in coal exports. In 2010, severance collections increased by 42.7 percent,
helping to offset other revenue declines, including a 41.1 percent drop in corporate
income tax revenue. As a result, West Virginia was one of the few states that did not
tap its emergency reserves during the recession, according to Pew's report
"Managing Uncertainty: How State Budgeting Can Smooth Revenue Volatility."
State tax collections have become more volatile over the past decade, according to a
recent study by the Nelson A. Rockefeller Institute of Government. Added volatility
complicates the already difficult tasks of revenue forecasting and budgeting, yet it is
not inherently bad. When receipts are higher than anticipated, states can improve
roads and bridges, pay down debt, or build up reserves. But periods of unexpectedly
high revenue may just as easily be followed by years of unanticipated low revenue
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Revenue Volatility Varies Widely by State and Tax Type

http://www.pewtrusts.org/en/research-and-analysis/analysis/201...

that prompt service cuts or tax increases to make ends meet. By studying volatility,
policymakers can put in place evidence-based savings strategies that harness tax
growth in good years to cushion the lean years.
Learn more about Fiscal 50.
Analysis by Steve Bailey and Brenna Erford

Data Visualization

Fiscal 50: State Trends and

Analysis

Video: Rainy Day Funds

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Revenue Volatility Varies Widely by State and Tax Type

http://www.pewtrusts.org/en/research-and-analysis/analysis/201...

Related Assets
Fact Sheet: Studying Volatility
Report: Building State Rainy Day Funds
Report: Managing Uncertainty

MEDIA CONTACT

Sarah Leiseca
Officer, Communications
202.540.6369
sleiseca@pewtrusts.org

TOPICS

Fiscal And Economic Policy, Governing

PLACES

United States
PROJECTS

States' Fiscal Health

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