States generally try to build up reserves in good times so they’re prepared for recessions and other fiscal emergencies and can avoid cutting public services during these difficult times. The amount of reserves a state needs depends on the potential volatility of its revenues and economy; states dependent on oil and other natural resources are particularly vulnerable because prices for these resources tend to fluctuate a lot. Sales taxes, which make up a third of state revenues, are rapidly collapsing as restaurants and stores across the country close their doors and lay off their workers. Income taxes, which make up another third of state revenues, also will decline sharply as mass layoffs rapidly push down people’s income and therefore their income taxes. Plus, the steep drop in the stock market means that wealthy people will soon begin reporting massive capital losses on their quarterly tax returns, further reducing state revenue.
