New research shows that US states have been making serious errors in forecasting their revenues during economic downturns, saddling lawmakers with new budget shortfalls as they try to allocate fewer resources, the Financial Times reports.
The main reason for the poor estimates is not the states' forecasting process, but their reliance on volatile parts of the economy, such as the stock market. In fiscal year 2009, half of them overestimated revenues from personal income, corporate income and sales tax revenues by at least 10.2 per cent.
Some states have grown to rely more on personal income taxes, particularly New York, Massachusetts and California, which levy highly fluctuating capital gains taxes. State sales tax revenues were historically more stable until the last recession when consumer spending dropped.
The study, which spans the period from 1987 to 2009, shows that forecasting has become progressively worse. “Compared to several decades ago, a greater proportion of retail sales are not taxable because they are services versus taxable goods,” Mr Ward said. “Services are much less likely to be subject to sales tax.”