A User's Guide to State Revenue Forecasting

One of the most difficult tasks in preparing a state budget is forecasting available revenues. An overly optimistic forecast may subsequently require unpopular budget cuts, tax increases, or both. A pessimistic forecast may trigger a political controversy over the size of the budget surplus, or may encourage additional spending that cannot be sustained in the future. Forecasters have always informally shared their experience with each other. Only in recent years, however have scholars begun to document those experiences.
A forecast user is an elected official, program manager, reporter or private citizen involved in the budget process who uses a forecast prepared by someone else as a basis for making or influencing policy decisions about state taxes and spending levels. __ While the objectives of these forecast users may vary depending on their role in the budget process, they all share one need in common: a sound forecast which provides them with the information they need to participate in the budget process. The first part of this article briefly reviews the status of revenue forecasting in the states. The second part reviews five specific forecasting issues. The third section, discusses limits of revenue forecasting. The concluding section is a summary and checklist of good revenue forecasting practices.     

Economic Conditions and State and Local Education Revenue

This article uses information on state and local education spending from 1989–1990 through 2005–2006 to examine the impact of economic conditions on the pattern of real revenue per student. We find that typical economic and other observable education demand determinants are significant in explaining the pattern of real revenue per student before and after the 2001 recession. We also find that there is no economically significant change in how governments responded to economic conditions after the 2001 recession. Finally, our results provide strong evidence that local governments attempted to offset state declines in revenues by increases in local revenues.     

Measuring the Impact of Lotteries on State per Pupil Expenditures for Education: Assessing the National Evidence

State‐operated lotteries have recently been asserted by public administrators and academicians as panaceas for eradicating revenue disparities existing across public school districts in the American states. The purpose of this research project is to empirically test the hypothesis that lottery revenues raise the state expenditures for public education. A state‐level national dataset, which includes fifty American states over the period 1977–1997, was used for the analysis. Pooled time‐series cross‐sectional and ARIMA modeling was employed to test the hypothesis. This study finds that lottery revenues had a positive influence on state per pupil expenditures for education. The evidence for the impact of lotteries on state per pupil expenditures for education was robust and statistically significant.     

State Government Expenditure Determinants and Tax Revenue Determinants Revisited

The primary aim of the research was to test the general hypothesis that many institutional and political variables affect fiscal outcomes; that the preferences of public officials, and the decision processes used to act on those preferences, matter. State government data (state only, not state and local) from 1980, 1985, and 1990 were used to specify state tax revenue and expenditure models. A previous (Merrifield, 1991) state tax revenue model identified many significant institutional and political variables, but it was based only on 1985 data (49 observations). The larger data set (147 observations), including better data for some of the variables, indicated that most of Merrifield's (1991) findings are robust. The state expenditure models facilitated a second test of the general institutional and political variable hypothesis, as well as the hypotheses about specific variables. The expenditure model also facilitated comparisons of expenditure and tax determinants, and comparisons with results published in the literature. Though there are some noteworthy differences between the expenditure and tax models, the expenditure models also supported many of the institutional and political variable hypotheses.     

The Impact of Tax Revenue from Capital Gains Realizations on State Income Tax Revenue and Budget Conditions

We explore the effect of the rapid increase in capital gains realizations on state income tax revenue during the 1990s and 2000s, and the effect that this had on state fiscal decisions regarding the use of these revenue. We find wide variation in the growth of capital gains realizations across states and that the growth in capital gains had a significant effect on state income tax revenue for many states. We find that states used a sizable portion of the additional revenue from capital gains to fund reserves in the year the revenue was generated, and that capital gains revenue lead to some reductions in taxes but not to increases in expenditures. The evidence suggests that states were conservative in their use of capital gains related revenues.     

Public Opinion, Public Policy and the Welfare State

A recurring problem in political analysis is to link public opinion to public policy. Public opinion has often come to mean the replies to structured questions in representative surveys. The task of connecting opinion and policy is complicated by the difficulty in interpreting replies to these surveys. The burgeoning literature on public opinion and the crisis of the welfare state has failed to provide a consistent account of what aspects of policy might be driven by public demand or vice versa. The interpretations of survey data are either misleading or highly selective. This applies to two crucial areas, attitudes towards poor minorities and opinions about state and private welfare. In order to provide a better understanding of the problems of linking policy and opinion and to offer some guiding principles for research in this area, this paper attempts to clarify some of these difficulties.     

Public Health and the Regulatory State

Public health has moved from the public good component of health to everything related to health and, then, to everything related to society. If we take public health in its wide, total, social sense, it presumably explains or justifies much of the regulatory state. Virtually all state activities contribute directly or indirectly to some citizens’ “physical, mental and social well-being” (as the World Health Organization’s definition says). Public health requires social engineering, which cannot be achieved without controlling the lifestyles that the Philosopher King doesn’t like. Controlling lifestyles cannot be done without regulating the businesses that would allow people to satisfy their sinful preferences, and without preventing these people from circumventing the controls through black markets or other violations of government regulation.     

Revenue Diversification in Public Higher Education: Comparing the University and Polytechnic Sectors

Financial stringency has been an increasing concern in the higher education sector, especially in the aftermath of the financial crisis. As a result, public higher education institutions have been under increasing pressure to diversify their funding sources through tuition fees and other nonpublic revenues. This article reflects on the institutional impact of those changes by analyzing a panel of 30 higher education institutions from the Portuguese public university and polytechnic sectors for the period between 2003 and 2009. The authors explore the relevance of institutional characteristics such as enrollments in undergraduate and postgraduate programs, the qualifications of academic staff, and the regional environment where institutions are located. Results suggest that certain institutional characteristics related to mission differentiation and the path of development of binary systems are important determinants of higher education institutions’ ability to earn income from tuition fees and other nonpublic sources.     

Which Contract State? Four Perspectives on Over-Outsourcing for Public Services

Since the term 'contract state' was coined over 20 years ago, there has been much discussion about the scope and limits of outsourcing and contractorisation. But attempts to fix the limits of outsourceability, using approaches such as transaction-cost analysis, the identification of inherently state functions and business-strategy ideas of 'core competences' seem fated to be indeterminate. What counts as over-outsourcing or inappropriate contractorisation depends on what basic values animate 'the' contract state. The limits of outsourcing will be different according to whether a state aims at 'steering', 'empowering', 'consumerism' or 'amoral' goals. Accordingly, a simple distinction between 'public bureaucracy state' and 'contract state' may be less important than analysis of different variants of the contract state.     

Often Wrong,Never Uncertain: Lessons from 40 Years of State Revenue Forecasting

Experience in state revenue forecasting humbles and educates the public finance scholar and can inform the public administrator. It teaches the limits of econometrics, the importance of disaggregation, the significance of tax administrators, the utility of causal models, the issue of data problems, the need to understand tax structure, the importance of consensus forecasts, the terror of recessions, and the reality of being wrong. In the Indiana consensus system, experience provides greater respect for public servants seeking to make a sustainable fiscal system function and probably contributes to making the revenue forecast binding in the budget process.     

Public Value and the Ideal State: Rescuing Public Value from Ambiguity

Public value theory has had its supporters and critics, with debate about the use of strategic management by public managers and confusion about the meaning of public value. This paper formalises Moore (1995) into a simple theory. That theory introduces the concept of an ‘ideal state.’ The ideal state is a simple means of describing and analysing public value, using a graphical presentation. In an ideal state roles are clear and public value is optimised. Insights from that ideal state are then applied to a more real world to clarify the nature of public value and to consider the appropriate use of strategic management by public servants. The conclusion is that public value theory provides some justification for strategic management, but the paper also demonstrates the limits to strategic management by officials.     

State Revenue Forecasts and Political Acceptance: The Value of Consensus Forecasting in the Budget Process

Concerns about political biases in state revenue forecasts, as well as insufficient evidence that complex forecasts outperform naive algorithms, have resulted in a nearly universal call for depoliticization of forecasting. This article discusses revenue forecasting in the broader context of the political budget process and highlights the importance of a forecast that is politically accepted—forecast accuracy is irrelevant if the budget process does not respect the forecast as a resource constraint. The authors provide a case illustration in Indiana by showing how the politicized process contributed to forecast acceptance in the state budget over several decades. They also present a counterfactual history of forecast errors that would have been produced by naive algorithms. In addition to showing that the Indiana process would have outperformed the naive approaches, the authors demonstrate that the path of naive forecast errors during recessions would be easily ignored by political actors.     

Dynamic Revenue Curves for North Carolina Taxes

Dynamic tax analysis allows a tax rate to affect the economic base being taxed. Consequently, the relationship between a tax rate and the taxed economic base is nonlinear and includes a region where a higher (lower) tax rate results in lower (higher) tax revenues. Relationships between the economic base and the tax rate are estimated for five major taxes in North Carolina. In all but one case, a statistically significant negative effect was found for the tax rate on the economic base. Dynamic relationships were strongest for the sales tax and weakest for the unemployment compensation tax.     

When the State Takes Over a Life: The Public Guardian as Public Administrator

Public guardians are appointed by the state to meet the needs of incapacitated citizens when no other willing or responsible surrogate decision maker exists. These public administrators, who live the decisional life of another citizen, need meaningful controls and accountability because of the great private and public authority that is entrusted to them. A review of program documents, interviews with public guardians and their program supervisors, and participant observations revealed complex roles for the public guardian: service monitor, service broker, client advocate, surrogate decision maker, and relationship architect. Because of the multiplicity of roles and few controls on their actions, public guardians' accountability should first be drawn from mechanical mechanisms (for instance, thorough audits and sanctions for infractions), but a second and necessary control is the principles of public administration, which are grounded in normative values and democratic governance.