When federal disasters are declared, the IRS often extends tax payment and filing deadlines. Though afflicted states are not required to follow suit with their own taxes, many do and then move hand-in-hand with the IRS decisions, potentially for many months to come. States like California and Florida, for example, almost invariably offer parallel extensions to those offered by the federal government. 

While this may be inevitable, as a local government or region recovers from a hurricane or tornado, “these extensions pose significant fiscal challenges for states,” according to a report commissioned by the National Association of State Budget Officers for the National Academy of Public Administration (NAPA).

As the report explains, these extensions, which last between two months and over a year, “can delay income tax filings and payments, disrupting state revenue forecasting, budget planning, and fiscal year-end balancing. As disasters become more frequent and IRS policies expand the scope and duration of relief, the financial and operational risks to states have grown.”

This isn’t a new problem, but with the escalating number of natural disasters from coast to coast it’s never been timelier. It is, of course, of greater consequence to states that rely a great deal on income taxes to pay their bills, like Oregon, California, New York, Massachusetts and Maryland.

A central finding of the report is that there needs to be better communication between the IRS and the states so that planning can be eased. Currently, according to the report, “state officials cannot anticipate when the IRS will further delay deadlines or for how long. From December 2022 to September 2024, the IRS granted 67 extensions . . .  The average relief lasted 204 days (more than 6 months from the date of the event).”

Beyond the actual lack of revenues this uncertainty can hobble critical revenue estimates. As the report explains, “delayed income tax filings due to a disaster-related tax extension can lead to a series of interconnected disruptions throughout the budget cycle and states typically do not have much room to wait.

"Lengthy extensions mean the budget office must base revenue estimates on out-of-date or incomplete data. These estimates are used to develop agency guidance, the executive budget document and, ultimately, for legislatures to enact appropriates bills. Adjustments are made as data and information become available, but these adjustments may be substantial if the disaster is severe or widespread.”

The report culminates with a series of recommendations to soften the impact of disasters on the state’s revenues and estimates.

The first several are directed at NASBO, which the report suggests: should inform state officials of the disaster-related tax extension policy; create mechanisms for IRS officials to communicate consult and coordinate with state officials and provide basic information about states’ income tax systems as well as the potential impact of disaster-related tax extensions to IRS officials. 

Beyond that, it recommends that states should plan for disaster-related tax extensions. “When a disaster occurs,” the paper recommends that “the governor must coordinate the response, deploy resources, communicate with the public and implement recovery plans.”

In addition, it advises that state officials need to sort out fiscal challenges. “Having a game plan for delayed tax filings and payments can simplify decision making when officials have many urgent matters to address. It can also give state officials time to develop options before they are needed.”

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