RALEIGH, N.C. (WNCN) — States with tighter COVID-19 restrictions and progressive tax structures tended to have higher tax collections during the pandemic year, according to a study co-authored by a professor at North Carolina State University.
“What we would suggest is as these COVID-19 restrictions increased, it actually benefited everyone in general, because now the states were able to be well-funded,” N.C. State professor Nathan Goldman said.
North Carolina is one of the 22 states where tax revenues increased last year — the opposite of what was largely expected.
Collections exceeded expectations by $4.1 billion, leaving the state in the position of being better able to fund programs like education and Medicaid, though state leaders have said they had no immediate plans to spend it.
“There’s actually benefits just to everyone in general to have these restrictions in place,” Goldman said.
Goldman says the combination of stricter rules to limit COVID-19 spread and a progressive tax structure could explain those increases.
“It paints this picture that the more strict these COVID-19 restrictions were, the better off the state tax revenues would be,” Goldman said.
Goldman and Gil Sadka of the University of Texas-Dallas studied the correlation between COVID-19 rules, structures of income tax rates and those tax revenues in 2020.
Most states have progressive income taxes, which means those who make more money pay higher rates. They found states with that tax structure and tighter COVID guidelines tended to see increased revenue compared to states with flat tax rates and looser pandemic-related rules.
One possible explanation: In states where tighter rules led to more job losses, frequently the people losing those jobs tended to have lower incomes while higher earners — who could work remotely — were more likely to keep theirs or even increase their earnings.
“There was a lot less retail-type jobs, there’s a lot less restaurant-type jobs,” Goldman said. “So when we kind of combine those two findings from our economics literature together, it paints this picture that the more strict these COVID-19 restrictions were, the better off the state tax revenues would be. And that’s pretty much what we find in our results.”
Those progressive taxes also can lead to income inequality because states collect more revenue when higher earners make more money. That can lead to policies that benefit higher-paid workers, Goldman said.
California, which has the most progressive tax structure in the country, also had some of the strictest COVID restrictions and reported a revenue increase of 1.2 percent to the U.S. Bureau of Economic Analysis. Meanwhile, Florida — which has no state income tax and relatively lax COVID-19 rules — had its tax revenue drop by 11.3 percent.
The comparison also holds between states with flat taxes: North Carolina had tighter COVID restrictions compared to Oklahoma, and had an increase in tax revenue while those collections dropped by 4 percent in the Sooner State.
“So you can kind of see that in those states where these, these two pieces fit together and they were able to lead to state tax benefits and higher state collections,” Goldman said.