A User's Guide to State Revenue Forecasting

Abstract

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.