Report: Errors Underly Many States’ Budget Forecasting Woes

A study released today by the Pew Center on the States and The Nelson A. Rockefeller Institute of Government found that the unpredictability of states three major revenue sources (income, sales, and corporate taxes)  has been the primary cause of inaccurate budget forecasting.  The Pew Center reports:

The study found that the primary culprit driving more serious and frequent errors is not the states’ processes, methods and techniques, but rather, the increasing volatility of the revenue streams themselves. This appears to result from states’ growing reliance on income taxes and the ways in which highly fluctuating capital gains affect income tax revenue.

“The stakes are high for policy makers as they continue to wrestle with significant budget gaps,” said Susan Urahn, managing director of the Pew Center on the States. “Errors in revenue estimating have been growing in size and frequency with each recession. This makes the challenging process of balancing state budgets even more difficult.”

“States have faced increased responsibilities and expenses at the same time revenues have become less predictable,” said Thomas L. Gais, director of the Rockefeller Institute of Government. “If elected officials don’t get good revenue forecasts, they’re not only forced to change their budgets and tax policies after they learn about errors, they’re also contributing to citizens’ skepticism about the budget process. Such skepticism, in turn, may make it even harder to build the coalitions needed to reduce large budget gaps.”

No one expects perfection in forecasting, even when the economy is stable and behaving predictably. There are a number of factors that contribute to a state’s ability to predict revenues with accuracy—including national economic forecasts state officials rely on to estimate their revenues, a state’s tax structure, its economic base and the budget processes in place—and the Pew-Rockefeller Institute study does not attempt to address them all or compare states directly. Rather, this study examined the trends in revenue estimating errors over time—in particular, over the business cycle—and what steps states could take to manage the unexpected shortfalls or surpluses.

Over two decades, half of all states’ revenue estimates were off by more than 3.5 percent, or $25 billion in 2009 dollars. What is notable is that these larger errors occurred more frequently in the past 10 years

 

To read the entire report, follow this link.

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