More than two years after the pandemic began and state governments were hit with fiscal challenges, revenue for most states has bounced back and is strong, according to a recent survey.

In fact, 25 states expect to exceed their forecasted revenues and another 17 are on track to meet their current general fund estimates for the current fiscal year, according to the National Conference of State Legislatures.

“In the near term, the fiscal situation in most states across the country is strong,” the group said. “Legislative fiscal directors describe revenue surpluses and growing rainy day fund reserves. Stronger than anticipated revenues, along with large amounts of federal aid will shape the conversations and policy decisions in many state capitols this session.”

States revenues on the upswing

Despite initial fears when the pandemic emerged, fiscal calamity didn’t ensue. In fact, as we have chronicled, states weathered the initial drop in revenue remarkably well (“Amid Turbulence, Muni Bonds Remain Steady”) with an important assist from the federal government.

Today, states report bright spots in a number of areas.

Personal income taxes, other state revenues on target

About half the states said personal income tax collections, which account for the largest portion of states’ revenue, revised their estimates upward. Several states expect to exceed projections. One state, Arkansas, revised its personal income tax forecast downward by $63.1 million, but still expects to exceed its overall revenue projections.

“Many sectors of the U.S. economy have largely rebounded from the effects of the pandemic, and unemployment rates are low. That, coupled with higher wages, are contributing to higher than estimated personal income tax collections,” the NCLS said.

The second largest portion of state revenues come from general sales and use tax collections, which are expected to exceed estimates in more than half the states and are on target in at least another six, the NCLS said.

More than 20 states said revenues from corporate income tax collections are above estimates, while at least five states said they’re on target. About half the states have revised their corporate income tax collections upward since the beginning of the fiscal year.

States also report strong collections from real estate transfer taxes, lottery taxes and assorted other taxes.

At the outset of the pandemic, states that rely more heavily on oil and gas taxes and tourism projected significant revenue declines.

Now, however, with gas and oil prices surging, states such as Alaska, New Mexico, North Dakota, Oklahoma and Wyoming expect to exceed revenue estimates. Nevada, which feared losses of tourism-related revenue, now also estimates its revenue will exceed projections.

The NCSL survey of legislative fiscal offices was completed primarily in December and January. While a few responses are still outstanding, NCSL said, no state indicated it is unlikely to meet its revenue forecast for the remainder of fiscal year 2022, which ends June 30 in all but four states and Washington, D.C.

“This is a survey we do midway through every fiscal year to touch base with states and see how general fund revenues are performing,” said Erica McKellar, of the NCSL, according to the Bond Buyer.

Of course, municipal bond investors are particularly interested in the fiscal health of states and other issuers. While conditions can certainly change, we find this snapshot encouraging.

There are many reasons why municipal defaults are exceedingly rare, and this report details one of them.

James A. Klotz is the President of FMSbonds, Inc. Email the Author03/10/2022