Tue March 8, 2011

Revenue Projection Errors Muddle States' Budget Plans

A new report finds that when it comes to forecasting revenues needed to balance the budget, fewer states are getting it right.   And the mistakes have a tendency to multiply when economic times are bad.

There is no foolproof formula for predicting how much revenue a state will generate, not even when the economy is stable and behaving in a predictable manner. But new research from the Pew Center on the States shows that during economic downturns – when getting it right matters more than ever – more states are not only getting it wrong, but also making larger errors. 

“This is all about knowing how much money you have to spend every year,” says study researcher Jeff Fehr.  “And if you don’t know how much is coming in, then it makes it difficult to deliver the services that taxpayers expect.”

The study found that in fiscal year 2009 - during the height of the economic downturn - state forecasting errors added up to an unexpected revenue shortfall of $49 billion nationally. 

Fehr says in the case of states like Colorado, the strong reliance on energy taxes makes forecasting riskier than for states with more diversified revenue streams. Colorado was hit with a double-digit decline in energy tax-related revenue last year, although those numbers appear to be bouncing back.

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