The Urban Institute says that State government tax revenue collections experienced a nominal decline of 12.8 percent and a real decline of 15.7 percent in the second quarter of 2023, compared to the same period the previous year. This downward trend is largely attributed to economic fluctuations and policy changes triggered by the COVID-19 pandemic.

Revealing the extent of this financial downturn, recent data from reputable sources paints an alarming picture. According to an article from the Urban Institute, preliminary data indicates ongoing year-over-year decreases in nationwide state tax revenue collections during the third quarter of 2023, marking the fourth consecutive quarterly nominal decline. Notably, the pace of this decline has considerably slowed. In the third quarter of 2023, nominal state tax revenue collections saw a moderate 1.2 percent decrease compared to the same period in 2022, largely attributed to declines in personal income tax revenues. Anticipated factors include a weakened stock market and state policy measures, encompassing tax rate reductions and rebate disbursements.

In light of these developments, there are increasing concerns about future fiscal health for states. According to an article from the Urban Institute, the fiscal trajectory for states remains notably uncertain, especially for those that have implemented enduring tax rate reductions. Ample rainy-day funds could mitigate challenges during the shift to slower revenue growth. Yet, in the event of economic downturns and persistently declining revenue, states may confront the imperative for increased revenue or implemented spending reductions in the foreseeable future.

This financial uncertainty has been greatly influenced by COVID-19 related policy interventions and their effects on local economies. According to a report released by The Urban Institute, tax revenues at state and local levels persist in mirroring economic shifts triggered by the COVID-19 pandemic and the corresponding policy interventions. In the years 2020 and 2021, the federal government infused trillions of dollars into the economy, offering vital assistance to consumers, businesses, and state and local governments to navigate the pandemic's challenges. However, these relief packages might have played a role in heightened inflation. Consequently, owing to unparalleled federal aid and substantial inflation, state and local government revenues experienced significant increases, particularly in nominal terms.

Further compounding these issues are states' varying approaches to tax reductions. According to a report from the Urban Institute, boosted by federal fiscal aid and robust tax collections, 13 states implemented income tax rate reductions for the 2022 tax year, with an additional 17 states following suit in 2023. Moreover, various states enacted diverse tax reductions, including refundable income tax credits, gas and sales tax holidays, and one-time rebate checks. Rebate specifics such as types, amounts, timing, and eligibility criteria varied widely among states. Examples include income tax rebates in Delaware, property tax rebates in New York, and both income and property tax rebates in Illinois. Distribution methods also differed ranging from single payments as in Hawaii to multiple payments like in New Mexico. Some states like Virginia issued rebates universally while others like California based them on factors like income ,tax-filing status or household size composition.