Pa. tax revenues approach ‘inflection’ point

With Pennsylvania Gov. Josh Shapiro’s first budget address a few weeks away, a new report suggests the Democratic governor may want to take a measured approach with his inaugural fiscal blueprint.

After recovering from pandemic losses in 2020, and rebounding in 2022, experts expect annual state tax revenue growth to “temper substantially” in 2023, as states’ finances hit a turning point, according to the analysis by the Pew Charitable Trusts.

The analysis shows that, from January 2020 through the end of most states’ 2022 budget year, the growth in tax revenues “outperformed its pre-pandemic growth trajectory in a record 32 states.”

And as the second quarter of 2022 came to an end, state tax revenues had reached their highest point since just before its historic decline in early 2020, the analysis showed.

Collections were 20.7% greater for the last quarter of 2019, after those tallies were adjusted for inflation, and averaged across four quarters to account for seasonal fluctuations, according to the Pew analysis.

Now, however, tax revenues are “on track for negative growth by the end of the current budget year amid looming economic uncertainties,” according to Pew.

“Although higher-thanexpected tax revenue growth, abundant federal aid, and record financial reserves have improved budget conditions recently, states must navigate several looming challenges, including slowing revenue growth as the economy weakens and monetary policy tightens, historically high inflation, and a tapering of federal COVID-19 aid,” the Pew analysis indicated.

Collections lag

Shapiro’s administration got its first indications of the state’s fiscal health earlier this month when the state Department of Revenue released tax collection totals for January.

The commonwealth collected $3.6 billion in tax revenue in January, coming in $205.6 million, or 5.5%, behind projections, state data showed.

Year-to-date tax collections for the fiscal year that ends June 30 total $23.3 billion, which is $297.5 million, or 1.3%, above estimate, acting Revenue Secretary Pat Browne said in a statement.

Shapiro, the former twoterm attorney general, came into office on Jan. 17 buoyed by a $5.4 billion surplus, but new data by the state’s official budget forecasters could signal rough sailing ahead despite the healthy balance.

For one, optimism sparked by the state’s historically low unemployment rate and declining inflation rates could be offset by declines in the job market, USA Today’s Pennsylvania Capital Bureau reported, citing research by the state’s Independent Fiscal Office.

A few more state highlights from the Pew analysis:

• “Most states (32) were below their pre-pandemic growth trends at the beginning of fiscal 2022. However, nearly half (14) of these states surpassed this recovery milestone over the course of the last four quarters: Alabama, Arizona, Connecticut, Florida, Indiana, Massachusetts, Missouri, New Jersey, North Carolina, Pennsylvania,

Rhode Island, South Carolina, Virginia, and West Virginia.”

• “New Mexico tax revenue outperformed that of all states — posting 17.1% more in collections than it would have raised had revenue continued at the state’s five-year pre-pandemic growth trend. The states with the next-strongest tax revenue gains compared with their pre-COVID growth trends were Idaho (16.7%), New York (14.0%), Illinois (10.8%), Utah (10.5%), and Montana (10.1%).”

• “Only Wyoming did not take in enough revenue to return to pre-pandemic levels, much less catch up to pre-COVID growth trends. Since the start of the pandemic, natural resourcedependent states have had some of the deepest declines in tax revenue. Recently, however, these states have experienced a sudden turnaround, with stronger tax revenue growth due largely to rising energy prices.”