Despite Diminishing Federal Aid Total Personal Income Beat Last Years
Total personal income was higher in every state in the third quarter of 2020 than a year earlier, with substantial but tapering government aid supporting individuals and businesses as the coronavirus pandemic continued to stifle economic activity. Without government assistance, personal income would have been lower than a year earlier in the majority of states.
Six months into the pandemic, two major factors drove increases in the sum of residents' personal income: robust government assistance and earnings, which rebounded somewhat from a steep decline in the second quarter. But the third quarter’s year-over-year gains were smaller than the substantial growth recorded in the second quarter, when an initial infusion of relief funds jolted this key economic indicator.
Government aid remained the primary growth driver, as temporary relief programs and benefits such as unemployment insurance and Medicaid continued to stabilize state economies during the pandemic. If not for government transfers to sustain total personal income, 27 states would have experienced overall declines, compared with all 50 in the previous quarter.
Earnings—which include wages from work and extra compensation such as employer-sponsored health benefits, as well as business profits—were higher than a year ago in 29 states as the economy began to recover from historic losses and more businesses reopened their doors.
Total personal income grew 5.9% nationwide in the third quarter compared with a year earlier— an annualized $1.1 trillion, after adjusting for inflation—with Arizona and Georgia recording the top year-over-year increases. North Dakota, Wyoming, and other energy-producing states, meanwhile, experienced much weaker growth.
Nationally, government transfer payments dropped about 24% from the second quarter, after accounting for inflation, but remained unusually high.
Combined state and federal government assistance dipped after declining unemployment levels reduced the number of individuals claiming benefits, most eligible Americans exhausted their stimulus payments, and some supports expired.
Year-over-year increases in government assistance ranged from about 18% in Mississippi to nearly 77% in Hawaii, mirroring upticks in unemployment rates.
Earnings rebounded in some states as more Americans returned to work. Nationally, earnings in the third quarter increased by about $65 billion from a year earlier inflation-adjusted annualized data, a marked turnaround from the $670 billion loss in the second quarter.
Pandemic-induced layoffs and business closures in the second quarter had triggered declines in earnings across all states, while in the third quarter just 21 experienced a drop compared with a year earlier, reflecting better economic conditions. Utah led all states with annualized earnings growth of 6.
7%, while Hawaii incurred the steepest loss of 7.3% as its tourism industry continued to struggle.
State personal income—a measure used to assess economic trends—matters to state governments because tax revenue and spending demands may rise or fall along with residents’ incomes.
It sums up all the money and benefits that residents receive from work, certain investments, income from owning a business and property, as well as benefits provided by employers or the government, including the extra federal aid provided in response to the COVID-19 pandemic.
Results for the third quarter of 2020 are estimates and subject to revision, as is Pew’s ranking of growth rates for state personal income.
Download the data.
State highlights over the past year
The third quarter of 2020 reflected a recovering economy after the pandemic and ensuing recession led to widespread business closures and layoffs earlier in the year. A comparison of estimated annualized growth rates in each state’s total, inflation-adjusted personal income between the third quarter of 2020 and a year earlier (subject to data revisions) shows:
- Arizona (8.5%) had the highest growth rate in the sum of all its residents’ personal income of any state, followed by Georgia (8.4%), Massachusetts and Pennsylvania (both 8.3%), and Rhode Island (8.1%). Georgia and Arizona were among states with the largest increases in earnings, and Massachusetts, Pennsylvania, and Rhode Island had some of the largest increases in transfers.
- Wyoming’s total personal income remained essentially unchanged, while North Dakota recorded only a modest increase (0.9%). Both were among only five states recording growth rates below 3%.
- In seven states—California, Hawaii, Illinois, Massachusetts, Nevada, New Jersey, and Pennsylvania—government transfer payments increased by at least 50% from a year ago.
- Among the 29 states with higher earnings than a year earlier, the strongest gains were in Utah (6.7%), Florida (5.7%), and Idaho (5.3%). The sharpest losses were registered in Hawaii (-7.3%), Wyoming (-3.8%), Nevada (-3.8%), and North Dakota (-3.7%).
States Recovered Unevenly From the Great Recession
States entered the new recession from vastly different starting points in terms of personal income growth over the longest economic recovery in U.S. history. Inflation-adjusted personal income eventually bounced back in all states from the Great Recession, but at different paces.
From the start of the 2007-09 downturn through the fourth quarter of 2019—the last quarter before the coronavirus pandemic started to derail the economy—Utah and North Dakota led all states with long-term compound annual growth rates equivalent to 3.4% and 3.
3% a year, respectively, followed by a group of mostly Western states. Connecticut and Mississippi lagged all other states with pre-pandemic growth rates equivalent to 0.9% a year, less than half of the U.S. rate of 2%.
These compound annual growth rates represent the pace at which state personal income dollars would need to grow each year to reach their current level, after accounting for inflation.
Alaska and North Dakota were the first states in which total personal income bounced back from its losses, in late 2009, just over two years after the onset of the Great Recession.
It wasn’t until the fourth quarter of 2014, seven years after the start of the recession, when the last state—Nevada—recovered.
In most states, it took about three years for the aggregate personal income to get back to pre-Great Recession levels, after accounting for inflation.
Although the use of compound annual growth rates allows for comparisons of states’ economic performance over several years, personal income did not actually change at a steady pace, instead falling in some years and rising in others, recently revised data.
No state escaped the Great Recession without a calendar-year drop in total personal income, but a handful of states can boast only one decrease, in 2009: Colorado, Idaho, Illinois, Mississippi, Utah, and Washington. The longest recovery on record ended on a high note with every state reporting calendar-year increases in personal income in 2018 and 2019.
What is personal income?
Personal income sums up residents’ paychecks, Social Security benefits, employers’ contributions to retirement plans and health insurance, income from rent and other property, and benefits from public assistance programs such as Medicare and Medicaid, among other items. Personal income excludes realized or unrealized capital gains, such as those from stock market investments.
Federal officials use state personal income to determine how to allocate support to states for certain programs, including funds for Medicaid. State governments use personal income statistics to project tax revenue for budget planning, set spending limits, and estimate the need for public services.
Growth in personal income should not be interpreted solely as wage growth; wages and salaries account for about half of U.S. personal income.
wise, growth in total state personal income should not be seen as a measure of how much the income of average residents has changed.
Other measures should be used to approximate income growth for individuals, such as state personal income per capita or household income.
Looking at state gross domestic product, which measures the value of all goods and services produced within a state, would yield different insights on state economies.
Download the data to see state-by-state growth rates for personal income from 2007 through the third quarter of 2020. Visit Pew’s interactive resource, “Fiscal 50: State Trends and Analysis,” to sort and analyze data for other indicators of state fiscal health.
Some states appear to hold the line on taxes, most won’t
Through much of 2020, there have been dire predictions regarding the effects of the COVID-19 pandemic on state and local budgets.
The health crisis has wreaked havoc on the economy and the general thinking has been that states would have to raise substantial amounts of revenue to balance their budgets.
The expected state budget shortfall estimates for fiscal years 2021 through 2023 are over $500 billion and considering second quarter 2020 state tax collections, the predictions are not without support.
The shutdowns of late March and April in many states resulted in mass furloughs and layoffs. As economic stability waned, many employees were either no longer generating income or were concerned about their future. Such concerns had a direct impact on consumer spending.
For the second quarter of 2020, sales and use tax collections fell by over 17% compared with the same quarter the year before. That was the first quarter-over-quarter drop in sales tax collections in over 10 years – the last being during the Great Recession.
Similarly, state individual income and corporate income taxes also fell, with overall state tax collections falling roughly 29% over the second quarter of 2019. However, individual and corporate income estimated payments and year-end filings were deferred to the third quarter and responsible for much of the reduction.
Early reporting and economic data has indicated that revenues substantially improved as deferred individual and corporate collections came through and the overall population began to spend again.
With those early numbers in mind, many prognosticators believed that states would have to substantially increase existing taxes and or adopt new taxes to increase revenue generation. But four states, which recently enacted or introduced budgets, have not yet raised taxes. One of those states has seemingly made it through the spring and summer relatively unscathed.
Idaho’s budget situation is so good that Gov. Brad Little would to use the projected $530 million surplus for fiscal year 2021 for tax relief. The governor’s office reports that the state is exceeding both income and sales tax collection projections.
For the second quarter of 2020, Idaho was one of the few states with state tax collection growth over the second quarter of 2019, including growth in both sales and use tax and individual income tax collections. Surprisingly, the state has a ten times larger surplus than was projected before the pandemic.
The specifics of what the governor and legislature will propose to do with the surplus are unclear.
Idaho makes an interesting case study for a number of reasons. According to U.S. Census estimates, Idaho was the fasted growing state by population between July 1, 2018 and July 1, 2019 with a growth rate of 2.1%. Idaho was the second fastest for the period before that.
Those numbers ly indicate much more about the state than the plentiful potato crops and beautiful scenery. With low average sales tax rates and moderate corporate income and personal income tax rates, Idaho would not immediately appear to have a significant tax advantage over other jurisdictions.
However, its average sales tax rate is lower than both California and Washington and its marginal individual income tax rate is significantly lower than both California and Oregon. Its corporate tax rate is similar to or lower than both California and Oregon.
Whether fueled by a more limited stay-at-home order or by overall economic growth, Idaho demonstrates that not all states will be in fiscal trouble in a post-pandemic world.
Holding off on tax increases
It is ly that states will hold off on tax increases as long as possible to appease economically burdened constituents navigating a global pandemic. Several examples of how states may approach that are below.
Connecticut Gov. Ned Lamont released a fiscal year 2021 budget with no new taxes – despite the state’s anticipated $2 billion deficit for that year. Most of the budget deficit is address through spending cuts and rainy day reserves.
But un Idaho, Massachusetts and Vermont, some businesses will pay more in taxes. Lamont’s budget retains a 10% corporate tax surcharge that was scheduled to expire in 2021. It also delays the elimination of the capital base tax also scheduled to expire in 2021.
Corporate taxpayers will ly face higher tax burdens than they would have if Lamont’s budget passes.
Massachusetts Gov. Charlie Baker recently submitted a $45.5 billion budget for fiscal year 2021 that does not include tax increases. The Baker administration did not significantly increase or decrease spending. The governor anticipated a budget short fall of $3.6 billion for fiscal year 2021.
The proposed budget makes up for most of the deficit by using enhanced Medicaid reimbursements from the federal government and by drawing $111.35 billion from the state’s rainy day fund.
The only tax related revenue raiser included in the Governor’s budget was a renewed proposal to adopt an accelerated sales tax remittance system. Currently, vendors must remit sales tax on a monthly basis.
The governor proposes that large vendors (those with more than $150,000 of sales in Massachusetts) remit collection every three weeks. Beginning in 2024, all retailers would be required to remit sales tax (collected on credit card or electronic transactions) on a daily basis.
Vermont enacted a $7.2 billion budget for the remaining nine months of the current fiscal year without any tax increases. There were several tax bills and amendments proposed but they were all ultimately defeated.
The budget passed unanimously in the state senate and overwhelmingly in the house. For the short year, the state faced a $200 million deficit. The shortfall was made up by a combination of reserves and federal aid.
Connecticut, Idaho, Massachusetts and Vermont have enacted or are pursuing budgets without tax increases. The circumstances in each state are different.
Idaho did not experience the budget shortfalls that virtually all states faced in 2020 and in-fact experienced healthy second quarter 2020 growth in both personal income tax and sales and use taxes over the same quarter last year. Connecticut, Massachusetts and Vermont took advantage of significant rainy day funds to avoid tax increases.
Many states will look to rainy day funds to trim anticipated deficits, although many states have already used up their reserves throughout 2020. While the results in these states look promising in terms of avoiding tax increases, they may not be typical.
While the states are collectively considering their budget positions going into 2021, many with decimated budgets, it seems ly that state tax changes are coming. Taxpayers may have an opportunity to take advantage of the various state tax and budget responses to plan for both personal and business growth.