The Financial Impact of Natural Disasters on Tax Revenues: A Natural Experiment Using a Difference-in-Difference Approach

In response to the increasing frequency of natural disasters, governments need to proactively estimate and address their financial implications to maintain fiscal resilience. This study employs various statistical models, including least squares regression and the advanced difference-in-difference (DiD) method, to assess the impact of natural disasters declared as major by FEMA on diverse tax revenues in U.S. states. In doing so, this study uses a sample of monthly tax revenues from New York and Pennsylvania states between 2007 and 2016 to ensure adherence to the common trends assumption crucial for DiD models. The findings indicate a negative influence of major disasters on income and total tax revenues but a positive effect on sales tax, aligning with hypotheses derived from existing literature. The study highlights the adverse impacts of disasters, emphasizing the importance of incorporating such considerations into budgetary planning. While disasters may stimulate economic activity post-event, the negative repercussions on income tax revenues underscore the challenges faced by governments in sustaining financial stability. Recognizing the varying effects of disasters by tax types, this study emphasizes the necessity of making informed budgetary decisions that account for the distinct financial impacts of natural disasters on government revenues.