State Tax Revenue Forecasting Accuracy PDF Download

State tax revenue forecasting is critical to states' fiscal planning because many states have constitutions or laws that require a balanced budget and restrict borrowing to fund deficits. We present three main findings about state tax revenue growth forecasts and state-specific aggregate public-company earnings growth. First, state tax revenue growth forecasts and aggregate earnings growth both predict future tax revenue growth, yet these two measures are not correlated. Second, adding aggregate earnings growth to a linear model that predicts state tax revenue growth with states' own revenue forecasts increases the explanatory power of the model by a factor of 1.72. Third, aggregate earnings growth increases the explanatory power of models of all major state tax types--personal income, sales, and corporate income--and contains relevant information about future state economic activity (e.g., GDP, employment, and consumption). However, we find that the predictive power of earnings for forecasting state tax revenue growth goes beyond its usefulness in predicting general state economic indicators. Taken together, these results suggest that aggregate earnings growth is a useful and unique predictor of state tax revenues that is omitted from current forecasting models. Because accurate revenue forecasts are necessary for the efficient allocation of government resources, these findings should be useful to those who prepare, monitor, or are otherwise affected by state tax revenue forecasting and budgeting.