State Revenue Forecasting and Estimation Practices · State Revenue Forecasting and Estimation...

Research Report No. 139 March 1993

State Revenue Forecasting

and

Estimation Practices

Published by:Federation of Tax Administrators

Washington, D.C. 20001

Federation of Tax Administrators

Board of Trustees

Officers of the Federation

Ron Schreiner, Secretary, PresidentSouth Dakota Department of Revenue

R.H. Hansen, Chairman, First Vice President Utah State Tax Commission

Joe B. Huddleston, Commissioner, Second Vice PresidentTennessee Department of Revenue

James W. Wetzler, Commissioner, SecretaryNew York State Department of Taxation and Finance

R. Gary Clark, Tax Administrator, Immediate Past PresidentRhode Island Division of Taxation

Harley T. Duncan Executive Director

Members of the Board

Stanley R. Arnold, Commissioner, New Hampshire Department of Revenue AdministrationRobert W. Chastant, Director, Delaware Division of RevenueA. Crawford Clarkson, Jr., Chairman, South Carolina Tax Commission*Ernest J. Dronenburg, Jr., Member, California, State Board of EqualizationWilliam C. Hamilton, Deputy Comptroller, Office of the Texas Comptroller of Public AccountsRalph Slaughter, Secretary, Louisiana Department of Revenue and Taxation*J. Basil Wisner, Chief Deputy Comptroller, Office of the Maryland Comptroller of the Treasury

*Past President of the Federation

State Revenue Forecasting

and

Estimation Practices

Published by:Federation of Tax Administrators

444 North Capitol Street, N.W. - Suite 348Washington, D.C. 20001

Ph. (202) 624-5890

Research Report No. 139 March 1993

Foreword

State officials use a variety of methods and procedures to developtheir official revenue forecast and estimate the impact of new tax changes.To assist state policymakers, state officials, and students of state taxation,the Federation of Tax Administrators has conducted a survey of stateforecasting and revenue estimation practices. The results are summarizedin this report. It catalogs the various practices in each state, summarizingwho the major and secondary players are in revenue forecasting, theprocedures followed in developing the official forecast, the different meth-ods of analyzing new tax changes, and some of the tools used by stateforecasters.

State Revenue Forecasting and EstimationPractices , written by Ro-nald Alt, FTA Research Associate, updates much of the data originallyreported in FTA Research Report 91, Research Units in State Revenue Agen-cies: Functions and Resources . The Federation of Tax Administrators ex-presses its appreciation to state tax agencies for their assistance in informa-tion gathering. Questions or comments on the report should be directed toFTA.

Sincerely,

Harley T. DuncanExecutive Director

Table of Contents

Executive Summary .................................................................................. i

Who Generates State Forecasts............................................................... 1Single Agency .......................................................................................................... 2

Consensus Forecasting................................................................................................... 3Other Methods ......................................................................................................... 6Role of Legislative Agencies................................................................................. 6

Other Organizations ....................................................................................................... 6

Summary of Forecasting Procedures................................................................... 8Budget Role .............................................................................................................. 8Council of Economic Advisors............................................................................. 8Forecast Review....................................................................................................... 8Estimate Updates .................................................................................................... 8Forecast Horizon ..................................................................................................... 10

Analyzing State Tax Changes................................................................... 10Agencies ............................................................................................................................. 10

Tax Incidence ........................................................................................................... 12Economic Impact..................................................................................................... 12

Forecasting Tools ..................................................................................... 12Source of Macroeconomic Data ........................................................................... 12Micro-simulation Models ...................................................................................... 14Sales Tax Models ..................................................................................................... 14Taxpayer Databases................................................................................................ 14

Conclusions ............................................................................................... 14Appendix A: Sample Questionnaire ....................................................... 17Appendix B: Survey Respondents.......................................................... 22List of Tables

Figure 1: Types of Revenue Forecasts ............................................................... 2Table 1: Single Agencies Forecasting State Revenue ..................................... 2Table 2: States Using Consensus Forecasting .................................................. 4Table 3: States Using Another Form of Forecasting....................................... 6Table 4: Legislative Agencies Involved in State Revenue Forecasting...... 7Table 5: Summary of Revenue Forecasting Practices .................................... 9Table 6: Agencies Estimating the Impact of Tax Changes............................ 11Table 7: Sources of State Macroeconomic Forecasts ...................................... 13Table 8: Use of Micro-simulation Models in State Forecasting ................... 15Table 9: Taxpayer Databases Used in Revenue Forecasting ........................ 16

Executive Summary

To gather information on who the major and secondary players are inrevenue forecasting, the different state policies, and some of the tools used by stateforecasters, FTA sent to its membership in mid-1991 questionnaires asking variousquestions concerning state revenue estimation practices. Results of the survey arepresented in this report. A brief listing of the highlights is given below.

1. Of the 47 responses (from 45 states, the District of Columbia and Ontario,Canada), 25 jurisdictions assign the responsibility of revenue forecasting to a singleagency. Eighteen states use consensus forecasting, while four states use anotherform (described in the text).

2. In only 27 states, the agency responsible for administering taxes producesrevenue forecasts. While in nine states, the tax agency is the primary forecastingoffice, it plays a secondary role in six states. Eleven consensus forecasting statesinclude the department of revenue in the forecasting group. The New HampshireDepartment of Revenue also provides some input into the forecasting process.

3. Twenty-six states have an agency under the direction of the legislature thatprepares independent revenue forecasts. In nine states, this agency is part of arevenue estimating consensus group, while in three states a legislative agencyprovides staff support for an independent consensus group. The legislativeforecasting agency prepares an unofficial independent forecast in 14 states.

4. The revenue forecast is a binding constraint on the budget in 32 states.

5. Eighteen states have a formal Council of Economic Advisors, while twoother states have informal groups. Twenty-seven states regularly consult witheconomists in universities or the private sector.

6. While all states make adjustments whenever unexpected circumstancesdictate, many states are required by statute to regularly examine and update theforecast. The survey finds that two states update estimates monthly, 14 states doquarterly updates, and 16 states update their forecasts twice a year. Seven statesproduce only annual updates, and 10 states do not have a requirement for regularupdates outside the normal budget process.

7. Only 24 states make separate long-term forecasts. In most states, thisforecast covers periods of five years or less, while three states make long-termforecasts for ten years or more.

8. Many states assign the responsibility of analyzing and estimating therevenue impact and of new tax law changes to agencies other than the stateforecasting office. In 15 states, the agency responsible for revenue forecasting is not

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State Revenue Forecasting and Estimation Practices

involved in tax analysis. Eleven states assign the responsibility of tax analysisto more than one agency.

9.Thirty-four states involve the tax administering agency in tax analy-sis. Legislative agencies play a key role in tax analysis in 16 states.

10. In analyzing the impact of new tax law changes, 18 states regularlyestimate the incidence, while another 10 do so occasionally. Meanwhile, onlysix states regularly estimate the economic impact of tax changes, with 10doing so occasionally.

11. Thirty-four states have an in-house econometric model to assist insetting economic assumptions. Twenty of these are state/regional modelsthat are driven by a separate national macroeconomic forecast.

12. Twenty-eight states have an in-house micro-simulation model. How-ever, 8 of these states reported using their simulation model for tax analysisonly.

13. Forty states reported compiling or using various taxpayer databases.Twenty-seven states have databases of individual income tax data, 18 havecorporate income tax databases, and 17 have sales tax databases.

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State Revenue Forecastingand Estimation Practices

Given the recent revenue shortfalls in manystates, considerable interest has developed con-cerning how states make their revenue forecasts.Consequently, the Federation of Tax Administra-tors conducted a survey of state revenue forecast-ing and estimation practices. The survey updatesmuch of the data originally reported in FTA Re-search Report #91, Research Units in State RevenueAgencies: Functions and Resources. However, itshould be noted that this report only catalogs thevarious state revenue estimating practices anddoes not make any value judgments as to theeffectiveness of one system over another.1

In June 1991, FTA sent a questionnaire tostate officials asking them to describe their rev-enue forecasting system and the different agenciesinvolved.2 We received responses from 45 states,the District of Columbia, and Ontario, Canada.3

This report presents the survey results. It firstidentifies the key state agencies responsible formaking the official forecasts and other players inthe state forecasting business. After briefly de-scribing different states’ forecasting procedures,the report then discusses the agencies responsiblefor estimating the revenue impact of state taxchanges and their procedures. And finally, thereport examines tools used by state forecasters formacroeconomic and revenue forecasting.

Before we proceed, it is helpful to distin-guish between the terms “revenue forecasting”and “revenue estimation.” For purposes of thisreport, revenue forecasting is defined as a baselineforecast of tax collections for current and futurefiscal years. A state typically makes its revenueforecast before the beginning of the budget cycle,with various revisions made as tax collection andeconomic data warrant. This contrasts with rev-enue estimation, which is defined as estimatingthe impact of new law changes. These estimatesare typically reported in a “fiscal note” accompa-nying the legislation. The note is designed to apprise

policymakers of the nature of the legislation andthe impact on state revenues. Often the analysisalso includes estimates of the incidence and eco-nomic impact in addition to the revenue impact.

Who Generates State Forecasts?

Often it is difficult to sift through statebureaucracies to find the agencies responsible forcertain functions. In this section, we try to shedlight on the agencies conducting revenue forecastsin each state. We identify the major and secondaryplayers in state revenue forecasting and discusstheir roles in the overall process. We also discussthe role played by legislative agencies in the fore-casting process, and point out other organizationsoutside government who make revenue forecasts.

To understand who forecasts state rev-enues, discussion of the overall process is required.The revenue forecasting process can be brokeninto three types which helps to highlight similari-ties and differences among states. Many statesempower a single office or agency with the re-sponsibility of producing the official forecast; otherstates have formal or informal groups that makethe official forecast by consensus; and finally, ahandful of states uses a process which does not fitneatly into either of the former two groups. This


1The reader is referred to other studies which examine theeffectiveness of state revenue estimates, such as StuartBretschneider and Wilpen Gorr, Economic, Organization, andPolitical Influences on Biases in Forecasting State Sales Tax Re-ceipts, International Journal of Forecasting, vol. 7, 1992, p.457-66.2While this report describes state revenue estimating systemsused in the FY 1992 budgets, FTA attempted to update theinformation for states making changes to their system. Forexample, the report presents the Michigan consensus forecast-ing system which began on January 1, 1992. However, thereport does not include the recent changes by Maine officialsto create a consensus revenue forecasting group.3Throughout the text, the District of Columbia and Ontario,Canada are treated as states.

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third type will be described below. Figure 1 summa-rizes which of the three processes is used in eachstate.

A Single Agency. The most common typeof forecasting procedure is the use of a singleagency. Twenty-five states designate a singleoffice as their official revenue forecaster. They are

summarized in Table 1, along with the approxi-mate number of people in each agency that isinvolved in forecasting.4 In all but one state, the

4Note, the data on the number of personnel involved in rev-enue forecasting may not be reported in a consistent mannerin each state (i.e., man years). Readers should use this datawith caution.

Table 1Single Agencies Forecasting State Revenue

State Agency # of people State Agency # of people

Alaska Dept. of Revenue 10 New York Div. of Budget 25Arkansas Dept. of Finance 3 North Dakota State Tax Commr. 3California Dept. of Finance 6 Ohio Office of Budget & Mgt. 2.5Connecticut Off. of Policy & Mgt. 4 Oregon Budget & Mgt. Div. 2Georgia Office of the Governor 5 Pennsylvania Dept. of Revenue 13Idaho Div. of Financial Mgt. 3 Tennessee Dept. of Finance & Admin. 1Illinois Bureau of the Budget 3 Texas Comptroller of Public Accounts 16Kentucky Fin. & Admin. Cabinet 5 Vermont Dept. of Finance & Mgt. 1.5Maine Bureau of Taxation 2 Virginia Dept. of Taxation 5Minnesota Dept. of Finance 3.5 West Virginia Dept. of Tax & Revenue 2Missouri Division of Budget & Planning 2 Wisconsin Dept. of Revenue 3New Jersey Office of Mgt. & Budget 3 Dist. of Columbia Dept. of Finance & Rev. 3

Ontario, Canada Min. of Treasury & Economics 3


Single Agency

Consensus Forecasting

Other Method

No Response

Types of Revenue ForecastsFigure 1

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office producing the forecast is within the execu-tive branch, delegating the legislature to an ad-visory role. Texas has an independently electedcomptroller’s office that both administers andforecasts state revenues. In most of these states,a separate budget or finance office is the primaryforecasting office with the tax collection agency(Department of Revenue or Taxation) playing asupporting role.

With access to confidential taxpayer data,the tax collection agency has a useful tool forforecasting. Still, the revenue department is theprimary forecasting agency in only eight statesand the District of Columbia: Alaska, Maine,North Dakota, Pennsylvania, Texas, Virginia,West Virginia, and Wisconsin. In six states—Georgia, Idaho, Illinois, New Jersey, New York,and Tennessee—the tax department producesan independent forecast that is used as input bythe official forecasting office. Meanwhile, theMinnesota and Ohio tax departments forecastonly selected revenue sources. Minnesota pro-vides the official forecast for selected excise andmiscellaneous taxes, while the Ohio Tax Depart-ment makes the official personal income taxforecast. In the remaining states, the tax collec-tion agency has an advisory role providing dataon historical and current collections.

While the legislatures in these states are rel-egated to an advisory role, they have differing de-grees of input into the forecasting process. In Alaska,the Legislative Finance Committee has access to theDepartment of Revenue’s forecast model, where theyprepare an alternative forecast based on differenteconomic assumptions. The final forecast is a com-promise between the executive and legislature onkey economic assumptions (mainly oil prices). TheIdaho state legislature must approve the official fore-cast, relying on testimony from various sources alongwith the executive’s finance office. In Virginia, thelegislature is consulted early in the process throughrepresentation on various economic and forecastadvisory councils. During the latest budget cycle thegovernor of Missouri solicited input from the legisla-ture by initiating a nonbinding consensus forecastingforum.


Consensus Forecasting. Often a state’srevenue forecast can become a political issue, asparties wishing to increase spending will try tomake additional funds available through an exces-sively optimistic revenue forecast. To reduce thechance of becoming entangled in politics, 18 statesassign the responsibility for developing the officialforecast to a group representing both the executiveand legislative branches.5 By requiring a groupconsensus, the process can create an official fore-cast acceptable to all parties. The various forecast-ing groups and their membership are summarizedin Table 2 (see page 4). The official name of theforecasting group, if there is one, is listed in italics.

There are two types of consensus forecasting.In the first type, members of the consensus group arecomposed of professionals from the different agen-cies responsible for revenue forecasting (i.e., BudgetOffice, Revenue Department, or Legislative Agen-cies). Each agency brings its own forecast and as-sumptions to the table. By discussing its differences,the group comes to an agreement on one singleforecast for the state. Ten states use this procedure,including Alabama, Arizona, Iowa, Kansas, Michi-gan, Mississippi, New Mexico, Rhode Island, Utah,and Wyoming. The second type of consensus fore-casting includes independent groups whose mem-bers are appointed by the executive and legislature.These groups typically turn to the resources of otheragencies to make their economic and revenue fore-cast. Only the council/boards in South Carolina andWashington have their own staffs. The Florida con-sensus group relies on Joint Legislative Managementand the Governor’s Office; Hawaii’s council relies onthe Department of Taxation; the Indiana TechnicalCommittee relies on the Budget Agency and theDepartment of Revenue; the Louisiana Conferenceturns to the Office of Planning and Budget and theLegislative Fiscal Office; Maryland uses the Bureau

5The legal or statutory basis for using a consensus forecastingmethod differs by state. While most of these states are re-quired by law to use consensus forecasting, some states formconsensus groups out of an informal agreement among all ofthe parties with one party having the “official” or statutoryresponsibility for the forecast. For a summary of the statutorybasis for states’ revenue forecasts, see The Council of StateGovernments, Revenue Forecasting and Estimating Survey, Feb-ruary, 1992.

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Table 2States Using Consensus Forecasting

Monitor # ofState Agency (E/L/I) Revenues PeopleAlabama Dept. of Finance E Yes 2

State Comptroller E No 2Dept. of Revenue E Yes 3Leg. Fiscal Office L No 2

Arizona Executive Budget Office E Yes 2AZ S. University (professor) I No 2Dept. of Revenue E No 4Joint Leg. Budget Comm. L Yes 4

Florida Florida Consensus Est. Conf. 12House - 1 representative L NoSenate - 1 L NoJnt. Leg. Management - 1 L YesGovernor’s Office -1 E Yes

Hawaii Hawaii Council on Revenues Yes N/A2 appointed by Senate Pres. L2 appointed by House spkr. L3 appointed by Governor E

Indiana State Budget Agency E Yes 24 appointees House & Senate LMajority & Min. Fiscal Staff LDept. of Revenue* E 2Business community rep.* IUniversity member* I

Iowa Revenue Estimating Conference YesDept. of Mgt. E Yes 1Leg. Fiscal Bureau L Yes 1Independent party+ I No

Kansas Consensus Estimation GroupDiv. of the Budget E Yes 2Dept. of Revenue E Yes 2Leg. Research Dept. L Yes 23 University Economists I

Louisiana Revenue Estimating Conference Yes 3Governor - representative ESenate President - representative LHouse Speaker - representative LUniversity Economist I

Maryland Maryland State Bd. of Rev. Est.State Comptroller I Yes 2State Treasurer L NoSecretary of Budget & Plan. E No

Michigan Dept. of Treasury E Yes 5House Fiscal Agency L Yes 2Senate Fiscal Agency L Yes 3

Mississippi State Tax Commission E Yes 1Center for Pol. Res. & Plan. E Yes 1Dept. of Finance & Admin. E 1Leg. Budget Committee L 1

Nebraska Econ. Forecast. Advisory Bd. No # 35 appointed by Leg. L4 appointed by Gov. E


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of Revenue Estimates in the Comptroller's Office;and Nebraska’s Forecasting Board uses the Legisla-tive Fiscal Analyst and the Department of Revenue.

The tax collection agencies are active par-ticipants in most of the consensus forecastingstates. The agency is a member of the consensusgroup in Alabama, Arizona, Kansas, Maryland,Michigan, Mississippi, New Mexico, Utah, andWyoming. In Indiana and South Carolina, thetax department is a nonvoting member of thegroup. Of the states using independent consen-sus groups, the tax collection agency provides arevenue forecast and other support in Hawaiiand Nebraska.

Table 2 also lists whether members of theconsensus forecasting group report to, or are ap-pointed by, the executive or legislative branches.Notice that several states require outside partici-pants on the consensus group who are indepen-dent of either branch. Independent parties help tocounter any attempts to skew the forecast for po-litical reasons and can provide useful expertise inthe forecasting field. Four states—Arizona, Kan-sas, Louisiana, and Wyoming—have provisionsfor university professors. Indiana has a represen-tative from the business community and a univer-sity professor as nonvoting members, and Iowarequires that a third independent party be chosenby the other members.

Table 2 (Continued) Monitor # of

State Agency (E/L/I) Revenues PeopleNew Mexico Dept. of Finance & Admin. E Yes total of

Taxation & Revenue Dept. E 8Leg. Finance Committee L

Rhode Island Revenue Estimating Conf. 1State Budget Office E YesHouse Fiscal Advisor LSenate Fiscal Advisor L

South Carolina Board of Economic Advisors Yes 3Governor’s appointee ESenate Fin. Comm. appointee LHouse W & M appointee LState Tax Comm. (2) E

Utah State Tax Comm E Yes 2Office of Planning & Budget E 1Leg. Fiscal Analyst L N/A

Washington Econ. & Rev. Forecast Council Yes 4Governor - 2 members EHouse - 2 members LSenate - 2 members L

Wyoming Leg. Service Office LDept. of Admin. & Infor. E Yes 3Oil & Gas Comm. EWY Geological Ser. EUniv. of WY IDept. of Education ETreasurer’s Office IDept. of Rev. & Tax. E

N/A - Not Available.* Nonvoting member.+ Selected by the other members.# The Dept. of Revenue is officially responsible for monitoring revenues.E: Executive; L: Legislative; I: Independent


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Other Methods. Four states, summarized inTable 3 below, have a forecasting procedure that doesnot fit into the other two categories. The process usedin these states can best be described as arbitration. Atthe beginning of the budget cycle, the agencies in-volved prepare independent revenue forecasts. Theprofessionals in these agencies attempt to reconcilethe differences in their forecasts. However, if anagreement is not reached, the legislature approves anofficial forecast by adopting one of the forecasts orcombining parts of each.

In New Hampshire, only the LegislativeBudget Assistant produces a full forecast eachyear. The Governor’s office typically provides aforecast prepared by outside consultants for thebiennial budget, while the Department of Rev-enue uses historical trends to provide an infor-mal opinion of future revenues.

Role of Legislative Agencies. Just as theU. S. Congress has the Congressional Budget Of-fice at the federal level,6 many state legislatureshave an agency under their jurisdiction with tech-nical expertise in revenue forecasting. The agencyacts as a check on the forecasts prepared by theexecutive branch and provides technical advice tolegislative leaders responsible for the states’ bud-gets. The agencies’ capabilities and roles in the

forecasting process differ across states. The legis-lative agencies and their respective functions aredescribed in Table 4 (see page 7).

The states using consensus forecasting,by definition, include a form of legislative par-ticipation. Ten states have a legislative agencyon the consensus forecast group. In addition,the independent consensus groups in threestates—Florida, Louisiana, and Nebraska—relyin part on forecasts and support from legislativeagencies. The Legislative Budget Assistant inNew Hampshire provides the primary annualforecast to both houses of the legislature. In 14states, a legislative agency prepares an indepen-dent forecast which is used in reviewing theexecutive budget. Both houses of the New YorkState Legislature produce their own forecasts.

Other Organizations. In some states,various organizations, both inside and outsidegovernment, attempt to influence the budgetaryprocess by producing an independent forecast.Independent treasurer or comptroller’s officesin California, Missouri, and New York prepare

6For a good summary of the federal revenue forecasting pro-cedures see Emil M. Sunley and Randall D. Weiss, The RevenueEstimating Process, in Tax Notes, June 10, 1991, pp. 1299-1313.

Table 3States Using Another Form of Forecasting

Monitor # ofState Agency (E/L/I) Revenues PeopleColorado Office of State Plan. & Budget E Yes 2

Leg. Council Staff L Yes 2

Montana Leg. Revenue Oversight Comm. LOff. of Budget & Prog. Plan. E Yes 3Leg. Fiscal Analyst L Yes 3

New Hampshire Legislative Budget Assistant L Yes 1Governor’s Office EDept. of Revenue E

North Carolina Leg. Fiscal Research Div. L 2Div. of State Budget & Mgt. E Yes 2

E: Executive; L: Legislative; I: Independent


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Table 4Legislative Agencies Involved in State Revenue Forecasting

State Legislative Agency NoteAlabama Leg. Fiscal Office Member of consensus groupAlaska Div. of Leg. Finance Prepares own forecast using Dept. of Revenue modelArizona Joint Leg. Budget Comm. Member of consensus groupArkansas Bureau of Leg. Research Prepares own (unofficial) forecast and monitors revenuesCalifornia Office of Leg. Analyst Reviews executive budget

Colorado Leg. Council Staff Prepares independent forecastConnecticut Office of Fiscal Analysis Prepares independent forecastFlorida Joint Leg. Management Prepares forecast for consensus groupGeorgia Leg. Budget Office Informal input into the executive budgetIdaho Leg. Auditor Provides staff support for the Leg. Revenue Projects Comm.

Illinois Economic & Fiscal Commission Prepares independent forecastIowa Leg. Fiscal Bureau Member of the Revenue Estimating (consensus) ConferenceKansas Leg. Research Dept. Member of the Consensus Estimating GroupKentucky Leg. Consultant Prepares independent forecastLouisiana Leg. Fiscal Office Prepares forecast for the consensus group

Maryland Dept. of Fiscal Services Prepares independent forecastMichigan House Fiscal Agency Member of the consensus group

Senate Fiscal Agency Member of the consensus groupMississippi Leg. Budget Comm. Member of the consensus groupMissouri Oversight Div. Prepares independent forecastMontana Leg. Fiscal Analyst Prepares independent forecast

Nebraska Leg. Fiscal Analyst Prepares forecast for the concensus groupNew Hampshire Leg. Budget Assistant Prepares primary annual forecastNew Jersey Office of Leg. Services Prepares independent forecastNew Mexico Leg. Finance Comm. Participates in preparing the official forecastNew York State Senate Staff Prepares independent forecast

State Assembly Staff Prepares independent forecast

North Carolina Fiscal Research Div. Prepares independent forecastOhio Leg. Budget Office Prepares independent forecastPennsylvania Leg. Staff Reviews executive forecastRhode Island House Fiscal Advisor Member of the consensus group

Senate Fiscal Advisor Member of the consensus groupUtah Leg. Fiscal Analyst Member of the consensus group

Vermont Joint Fiscal Office Prepares independent forecastWisconsin Leg. Fiscal Bureau Prepares independent forecastWyoming Leg. Service Office Member of the consensus group

annual state revenue forecasts. Taxpayers' asso-ciations, chambers of commerce and other pri-vate sector organizations are another source ofalternative state revenue forecasts in Idaho, Illi-nois, Georgia, Missouri, and West Virginia. Stateuniversities with their special research person-nel provide a good source for state revenueestimation. As discussed above, several stateshave university personnel in their revenue fore-

casting groups. In addition, universities in fivestates produce forecasts as a check on the states'official forecast: the University of Michigan,several Georgia universities, a consortium of themajor universities in Idaho, several universitiesin Illinois, and the University of Missouri. InAlabama, a nationally recognized research firmis engaged annually to estimate growth in thekey state tax sources.


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Summary of ForecastingProcedures

The survey asked state officials severalquestions concerning their forecasting practices.Questions asked if the forecast binds the budget,about the role of economic advisors in each state,the forecast review process, the frequency ofupdates, and the forecast horizon. The responsesare summarized in Table 5 (see page 9).

Budget Role. The results illustrate the im-portance of the revenue forecast in the budgetprocess, since the final estimate is a binding restric-tion on the budget in 32 states. In these states, therevenue estimates effectively constrain the level oftotal appropriations. State policymakers wishingto increase spending on certain programs must cutother programs or increase taxes, given a balancedbudget requirement and an agreement on an ap-propriate ending balance.

Council of Economic Advisors. Manyprofessionals in the revenue estimating field pointto the benefits of seeking advice from outsideexperts throughout the forecasting process. Econo-mists in academia and the private sector are auseful source of information on the current andfuture outlook for the state economy. They canalso provide useful advice on the revenue estimat-ing techniques used by state officials. Bringing inoutside experts is one of the suggestions in theNational Association of State Budget Officers' hand-book Good Practices in Revenue Estimating.7 AsTable 5 shows, 18 states have a formal Council ofEconomic Advisors. Missouri and Rhode Islandhave informal groups of economists advising theirrevenue estimators.

In addition, some states informally consultwith economists in the private sector. Twenty-seven states reported making use of state univer-sity economists in the revenue estimating process.Many economists provide informal advice or tes-timony to the various revenue estimating commit-tees or offices. New Mexico and Tennessee rely oneconomists at the state university to provide anindependent local economic forecast for revenue

estimation purposes. In New Mexico, this practiceavoids some of the disparities in revenue estimatesamong the consensus participants due to the use ofdifferent economic assumptions. South Carolinarecently set up a National Advisory Council, com-posed of outside economic experts, to provideadvice to the revenue estimating board and thelegislature. Six consensus estimating states—Ari-zona, Indiana, Iowa, Kansas, Louisiana, and Wyo-ming— have provisions for university economistsor other outside experts on the group. Reflectingthe state’s major industry, Alaska regularly con-sults with experts in the oil industry.

Forecast Review. Only six states employa formal process to review the final forecast. How-ever, the degree of review differs among thesestates. In some, the review entails reporting to thelegislature, which must certify the amount of rev-enue needed. In the District of Columbia, the citycouncil holds hearings on the annual revenue esti-mate and makes judgments on its reliability. InKentucky, the auditor of public accounts mustreview and certify the estimates. Virginia has anextensive revenue estimation and review proce-dure set out by statute. Though the Department ofTaxation is primarily responsible for the state’sforecast, it also receives input from several groups.Groups of public- and private-sector economistsprovide advice on the state’s economic outlook.Legislative leaders are also involved in some advi-sory groups, which brings them into the forecast-ing process earlier.8

Estimate Updates. The survey asked staterevenue estimators how often they examine theirestimates and make formal revisions. While allstates make adjustments whenever unexpectedcircumstances dictate, Table 5 summarizes howfrequently revenue estimates are updated accord-ing to state statutes or tradition. Only three states

7Good Practices in Revenue Estimating, by Marcia Howard,National Association of State Budget Officers (NASBO) lists 10general guidelines for good revenue forecasting. Copies of thereport are available from NASBO.8A detailed discussion of Virginia’s revenue forecasting andreview processes is given in, The Virginia Revenue EstimatingProcess, presented to the 1989 FTA Revenue Estimating andTax Research Conference, by Stuart W. Connock, October 23,1989.


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Table 5Summary of Revenue Forecasting Practices

Council of Estimates FormalEconomic Bind Estimates Review Forecast Horizon

State Advisors Budget Updated Process Short-term Long-termAlabama No No Annual No Current+1Alaska No No Semi-annual No C+2 C+20Arizona No Yes Quarterly No C+2 C+3Arkansas Yes Yes Quarterly No C+1* C+2*California No No 3 times/year No C+1 as needed

Colorado Yes No Quarterly No C+2Connecticut No No Monthly No C+1 C+5Delaware Yes Yes 6 times/year No C+1Florida Yes Yes Semi-annual No C+2* C+10Georgia No Yes Annual No C+1 C+5

Hawaii No Yes 4 times/year No C+6*Idaho No No Semi-annual No C+1Illinois No Yes Quarterly No C+2Indiana Yes No 2 times/year No C+1* C+2*Iowa Yes Yes Quarterly No C+1

Kansas No No Semi-annual No C+1Kentucky Yes Yes As necessary Yes C+2*Louisiana Yes Yes Quarterly No C+1 C+4Maine No Yes Semi-annual No C+1* C+2*Maryland No No As necessary No C+1 C+10

Massachusetts No Yes Semi-annual No C+2Michigan No No Semi-annual Yes C+2Minnesota Yes Yes Semi-annual No C+2* C+4*Mississippi No Yes As necessary Yes C+1 C+2Missouri Informal No As necessary No C+1 C+4

Montana No Yes As necessary No C+2* C+4*Nebraska Yes No Semi-annual No C+2*Nevada No No As necessary No C+2*New Hampshire No Yes Monthly No C+1* C+5New Jersey Yes Yes Semi-annual No C+1 C+4

New Mexico No No Annual No C+1New York Yes Yes Quarterly No C+1 C+5North Carolina No Yes Semi-annual No C+4*North Dakota No Yes Semi-annual No C+2*Ohio Yes Yes Semi-annual No C+2*

Oklahoma No Yes As necessary No C+1Oregon Yes Yes Quarterly No C+4*Pennsylvania No Yes Annual No C+1 C+5Rhode Island Informal No Quarterly No C+1South Carolina No Yes 4 times/year Yes C+1 as needed

South Dakota No No As necessary No C+1Tennessee No Yes Semi-annual No C+2Texas Yes Yes As necessary No C+3*Utah No Yes Quarterly No C+1 C+5Vermont Yes No Semi-annual No C+1* C+3

Virginia Yes Yes Quarterly Yes C+3* C+8*Washington Yes Yes Quarterly No C+1* C+3*West Virginia No Yes Annual No C+1 C+3Wisconsin No No Biennially No C+2*Wyoming No No Annual No C+4*Dist. of Columbia No Yes Annual Yes C+1 C+6Ontario, Canada No No Monthly No C+3

*Biennial Budgets. The forecast horizon varies based on whether it is the first or second year of the biennium.


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date estimates as frequently as monthly. Four-n states update revenue estimates on a quar-ly basis, while 16 states report twice a year.ven states reported annual updates only. Wis-nsin does not have any regular updates outsidethe biennial forecast. Nine states report that thevenue estimates are updated as necessary. Cali-nia revises the forecast three times a year, andlaware six times.

Forecast Horizon. The table also presentsormation on states' short- and long-term forecastrizons. The survey finds that only six states projecteir short-term forecast for more than two years.ost states (29) forecast only one year ahead of therrent year, while another 16 forecast two years intoe future. States with biennial budgets typicallyecast to the end of the current or next biennium.e forecast horizon in these states will vary accord-

g to whether they are in the first or second year ofe budget.

While long-term forecasts that extend oververal years will suffer in accuracy, they are use- for planning and tax policy analysis. A poten-l structural deficit is more likely to show up withonger forecast horizon. In addition, a long-termecast is helpful in analyzing the long-run effecttax policy changes. The survey points out thatly 24 states make separate long-term forecasts,th most covering periods of five years or less.aska makes a twenty-year forecast, while Floridad Maryland project tax collections for a ten-yearriod. California and South Carolina report thatng-term forecasts are made whenever necessary.

Agencies AnalyzingState Tax Changes

The survey also asked state officials severalestions concerning estimating the revenue impactd analyzing the effects of new tax changes. It askedhich agencies are involved in revenue estimation,e number of proposed tax changes analyzed in apical year (number of fiscal notes), and whetherey regularly estimate the incidence or economicpact of tax changes. The results are summarized inble 6 (see page 11).

ate Revenue Forecasting and Estimation Practices

Agencies. A quick glance at the agenciesin Table 6 reveals that many states assign the taskof revenue estimation to agencies other than thoseresponsible for forecasting. In 15 states, the agencyresponsible for forecasting is not involved in ana-lyzing the impact of tax law changes. Some stateshave other offices along with the regular forecast-ing agency producing fiscal notes, with 11 statesreporting that they assign the duties of revenueestimation to more than one agency. California,Indiana, Nebraska, New Hampshire, and Wyo-ming require any agency affected by a law changeto prepare a fiscal note. The tax collecting agencyhas an advantage in conducting tax analysis be-cause of its access to confidential taxpayer data.Therefore, it is not surprising that 34 states rely onthe revenue/tax departments for revenue esti-mates of tax changes. In addition, three other statetax departments—Arizona, North Carolina, andVermont— provide substantial input into produc-ing revenue estimates when requested.

The table points out how legislative agen-cies also play a key role in the revenue estima-tion process in 16 states. Eight states have anarrangement similar to the federal governmentwith two offices, one in the legislative branchand one in the executive branch, estimating theimpact of new law changes. Meanwhile, thelegislative agency is the sole office preparingfiscal notes in eight states, including, Arizona,Connecticut, Indiana, Louisiana, Maryland,North Carolina, Oregon, and Wyoming. Thelegislative agency is responsible for coordinat-ing revenue estimation/tax analysis activities infour states—Nebraska, New Hampshire, Texas,and Utah. In New Mexico, the legislative staffperforms a critical review of the estimates pre-pared by the Revenue and the Finance Depart-ments.

Revenue estimates and any analysis pre-pared for new legislation are formally reported infiscal notes which accompany a tax bill. The sur-vey asked state officials how many fiscal notes aretypically prepared in a year. The number variesfrom a low of only 10 to 20 prepared in Alaska, toapproximately 3,000 in Maryland. Most statesprepare about 100 to 200 fiscal notes a year.

Table 6Agencies Estimating The Impact of Tax Changes

# Fiscal Estimates EstimatesState Agency (E/L/I) Notes Incidence Econ. ImpactAlabama Dept. of Revenue E 105 Yes No

Leg. Fiscal Office L 2,500 + Yes YesAlaska Dept. of Revenue E 10 to 20 Yes if relevantArizona Joint Leg. Budget Comm. L — No NoArkansas Revenue Div. E 100 Yes if requestedCalifornia Dept. of Finance E — Yes Yes

Agency Administering Tax * E 75 to 300 Yo NoLeg. Analyst Office L — No No

Colorado Dept. of Revenue E — if requested NoConnecticut Office of Fiscal Analysis L 1,000 No NoFlorida Dept. of Revenue * E — No No

Leg. Mgt. Comm. L — No NoGeorgia State Auditors Office L 100 if requested if requested

Office of Plan. & Budget E Hawaii Dept. of Taxation E 200 Yes NoIdaho Div. of Fin. Mgt. E 30-40 occasionally occasionally

Leg. Budget Office L Illinois Agencies Affected by tax change — 10-15 occasionally occasionallyIndiana Leg. Services Agency L 150 Yes # NoIowa Dept. of Revenue & Finance E 100-125 Yes # NoKansas Dept. of Revenue E 500 occasionally occasionally

Leg. Research Dept L Kentucky Office of Financial Mgt. E 150/biennium Yes YesLouisiana Leg. Fiscal Office L 250-300 Yes NoMaine Bureau of Taxation E 100 No NoMaryland Dept. of Fiscal Services L 3,000 + No NoMichigan Dept. of Treasury E 40 Yes YesMinnesota Dept of Revenue E 200-300 Yes NoMississippi State Tax Comm. E 100 — NoMissouri Div. of Budget & Plan. E 70 Yes No

Dept. of Revenue E 100-150 Yes —Montana Dept. of Revenue E 300 Yes NoNebraska Agencies Affected • — 1,383 No NoNew Hampshire Agencies Affected • — — No NoNew Jersey Div. of Taxation E 157 No NoNew Mexico Taxation & Rev. Dept. E 200-300 No No

Dept. of Finance & Admin. E New York Div. of Budget E 160 No No

Dept. of Taxation & Finance E North Carolina Leg. Fiscal Research Div. L 50-200 if requested NoNorth Dakota State Tax Commr. E 125/biennium Yes occasionallyOhio Dept. of Taxation E 50-100 occasionally No

Leg. Budget Office L Oregon Leg. Revenue Office L 187/biennium No NoPennsylvania Dept. of Revenue E 50 Yes occasionallyRhode Island State Budget Office E — No NoSouth Carolina Tax Comm. E 250 No NoTennessee Dept. of Revenue E 150 No NoTexas State Comptroller • I — No NoUtah State Tax Comm. • E >100 No NoVermont Dept. of Finance & Mgt. E >25 Yes occasionally

Joint Fiscal Office L Virginia Dept. of Taxation E 200 No NoWashington Dept. of Revenue E 150 Yes NoWest Virginia Dept. of Tax & Revenue E 125 occasionally NoWisconsin Dept. of Revenue E 195-231 No NoWyoming Leg. Service Office * L >200 if requested if requestedDist. of Columbia Dept. of Finance & Revenue E 25-50 Yes YesOntario, Canada Ministry of Treasury E — occasionally Yes

+ The number of fiscal notes reported includes other tax bills.* Other state agencies affected by tax change must estimate the impact.# Incidence estimated on income tax changes only.• Fiscal notes are coordinated by a legislative fiscal/budget agency.E: Executive; L: Legislative; I: Independent


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rizes the many different sources of economic activ-ity used by state officials.

Given the importance of economic fore-casting in the overall process, it is not unusual thatthe agency responsible for the revenue forecastalso sets the economic assumptions. These agen-cies, with a few exceptions, maintain and updatethe states’ econometric models. In Arkansas, Iowa,Michigan and Tennessee, state forecasters turn tothe expertise of university economists to maintaina state econometric model. The Maine revenueforecasters rely on the advice of the State PlanningOffice to set their economic assumptions. Thisoffice also has the role of economic advisor to stateofficials. In the consensus states, the members ofthe group usually develop a state economic fore-cast by consensus. Any state econometric modelsare generally maintained and updated by agenciesproviding support for the group. In New Mexico,all members of the consensus group agree to usethe results of the University of New Mexico's,Bureau of Business and Economic Research eco-nomic model. This makes it easier for the group toagree upon a single state economic outlook. TheKansas Estimating Conference does not have anin-house state model but relies on the technicaladvice of three university economists.

Table 7 (see page 13) summarizes the sourcefor state and national macroeconomic forecasts.Many states have access to an in-house economet-ric model for the state and/or national economy.This enables forecasters to understand how vari-ous economic variables move under alternativescenarios. However, 13 states reported having noin-house econometric model. These states rely onnational and regional forecasts by the major fore-casting firms. Another 20 states use the nationalforecast of the major forecasting firms while alsomaintaining an in-house state/regional economet-ric model. These models provide state forecasterswith more detailed state economic data than na-tional sources and allow them to make state eco-nomic predictions under varying scenarios. Inaddition, by relying on the major forecasting firmsfor a national economic forecast, state officials canbe certain that their economic assumptions willnot vary from other mainstream economists. As

Tax Incidence. State tax policymakers areways concerned about who bears the burden ofy new tax. As a result, it is not surprising to seet many states try to estimate the incidence of

w tax changes. As the accompanying tablestrates, 18 states regularly estimate the inci-

nce, while another 10 do so occasionally, or ifuested by the bill supporters. However, often incidence cannot be determined accurately.

me states noted that they estimate incidencey on income tax changes, and Minnesota esti-ted the incidence on changes redistributingenues by more than $20 million. Ontario, Canadaorted estimating tax incidence as part of the

dget process only.

Economic Impact. With the recent eco-mic slowdown affecting many voters, the surveynts to a surprisingly few number of states thatularly estimate the economic impact of new tax

w changes. Several states noted that they explicitly Regional Economic Models to forecast economicnges, while many reported they perform qualita-

e analysis of only the economic effect. Overall,y six states regularly estimate economic impacts,ile another 10 reported that they do so occasion-

y or upon request.

Forecasting Tools

To many students of state tax systems, theans by which state forecasters generate theirenue forecast are a mystery. This section at-

mpts to shed some light on the mystery by dis-sing state forecasters’ tools. While they gener-

y use a variety of tools ranging from simple dataes to sophisticated computer models, this re-

rt examines four key tools. They include: statecroeconomic models, micro-simulation mod- specialized sales tax models, and various tax-

yer databases.

Source of Macroeconomic Data. Recentperiences with the current economic slowdownstrate how state revenues are linked to theformance in the economy. Thus, economicumptions are an integral part of the forecasting

ocess. Many times state forecasters point toanges in the economic forecast when revisingir revenue projections. This section summa-

te Revenue Forecasting and Estimation Practices

Table 7Sources of State Macroeconomic Forecasts

National Model State/Regional ModelAlabama (1) National Forecasting Firms, Private Consultants, and University ModelsAlaska —————————— Various National Sources——————————Arkansas WEFA 120-equation PC ModelCalifornia 400-equation model 150-equation state model and two 120-equation

models for Los Angeles & San FranciscoColorado 800 PC Model 3 PC models, with 100+ equationsConnecticut ———————————— Mainframe model ————————————Florida DRI Mainframe & mini-computer modelsGeorgia ———————— 32-equation mainframe model ————————Hawaii (1) ————————————— In-house model —————————————Idaho DRI 80-equation PC modelIllinois WEFA & DRI PC modelIndiana ———————————— Mainframe model ————————————Iowa ——————————— Mainframe model (2) ———————————Kansas (1) ——————————— No in-house model (3) ——————————Kentucky DRI 35-equation PC modelLouisiana (Leg.) WEFA Mainframe model with 20-30 economic equations

(Exec.) WEFA 50-equation PC modelMaine WEFA PC based modelMaryland ———————— WEFA, DRI, & Turning Points ————————Michigan ——————— 200-equation mainframe model (4) ———————Minnesota DRI PC based modelMississippi WEFA 170-equation PC modelMissouri —————— Blue Chip & Lawrence Meyers & Assoc. ——————Montana WEFA single equation PC modelNebraska —————————————— WEFA & DRI ——————————————New Hampshire ————————————— In-house model —————————————New Jersey ———————————————— WEFA ————————————————New Mexico (1) WEFA 60-equation PC or Mainframe model (5)New York ——————— 150-equation Mainframe model (6) ———————North Carolina ————————————————— DRI —————————————————North Dakota ———————————————— WEFA ————————————————Ohio ————————————— PC based model —————————————Oregon DRI 66-equation PC modelPennsylvania ———————————————— WEFA ————————————————Rhode Island ————————————————— DRI —————————————————South Carolina National forecasting firms 51-equation PC modelTennessee ————————— Provided by Univ. of Tennessee —————————Texas DRI & WEFA 140-equation PC modelUtah ————————————— In-house model —————————————Vermont DRI 35-equation modelVirginia WEFA 150-equation PC modelWashington DRI & PC based model 116-equation PC modelWest Virginia ————————————————— DRI —————————————————Wisconsin DRI 150-equation mainframe modelWyoming WEFA 100+ equation PC modelDist. of Columbia ———————————Major forecasting firms ———————————Ontario, Canada —— PC based model (260 national & 94 local equations) ——

WEFA: Wharton Econometrics Group; DRI: Data Resources Inc. and McGraw-Hill.(1) The official economic forecast is the result of an agreement among the consensus participants.(2) State econometric model is maintained by the Institute for Economic Research at the University of Iowa.(3) Economists from the three major state universities (University of Kansas, Kansas State University, and Wichita State University) advise theconsensus members on the state’s economic outlook. State also subscribes to DRI.(4) Econometric model was developed and is maintained by the University of Michigan. State forecasters also subscribe to WEFA, DRI, andBlue Chip forecasts.(5) The econometric model was developed and is maintained by the Bureau of Business and Economic Research at the University of New Mexico.(6) Currently being moved to an in-house mini-computer.


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pointed out in Table 7, most of these models are PCbased and are driven by a national economic forecast.Many were originally developed by one of the majorforecasting firms, with most states reportedly mak-ing modifications or enhancements in-house.

The invention of the personal computer hasenabled many more people to become involved withmacroeconomic forecasting. For example, 14 statesin our survey have the capability to forecast bothnational and state economic variables in-house. AsTable 7 points out, some states, such as California andColorado, use several different models of differentsize and sophistication. Other states still rely on largemainframe models, which were developed and aremaintained by others. Still, many of the states withtheir own econometric models also subscribe to thedata provided by the major forecasting firms, forcomparison with their own models.

Micro-simulation Models. State officialsuse a variety of tools to translate their state economicforecasts into a revenue forecast. One tool that re-quires further discussion is the micro-simulationmodel. It uses taxpayer based data to forecast variouscomponents of a major tax source (withholding,estimated taxes, etc.). Micro-simulation models aredriven by a forecast of economic and taxpayer data.Table 8 (see page 15) lists 28 states that use them.However, eight of these states reported that theirsimulation model is used strictly for tax analysis.

Table 8 also summarizes the type of systemsand taxes forecasted by micro-simulation models.Because of the large amount of taxpayer data thatmust be stored with simulation models, many of theearlier models were developed on mainframe com-puters. However, the advances in personal com-puter technology have made these models moreaccessible. Thirteen states reportedly use PCs for oneor more of their simulation models. Meanwhile, theindividual income tax is by far the tax most widelyforecasted by micro-simulation models. Some statesalso employ simulation models for corporate/busi-ness taxes, and severance taxes where they are amajor revenue source.

Sales Tax Models. Accounting for 33 per-cent of total tax collections, the general sales tax is thelargest single source for state governments. Notsurprisingly then, 32 states have one or more specialcomputer models to forecast and track sales tax

collections. They are typically time series modelsdriven by the states’ economic forecast. Many of themodels are based on a personal computer and rangefrom a simple single equation model to a morecomplex 42- equation model in Texas. The morecomplex models forecast sales tax collection by vari-ous industries and may also forecast other grossreceipts based taxes.

Taxpayer Databases. Taxpayer return dataare a valuable source of information useful to rev-enue forecasting and tax analysis. Taxpayer returndata are essential for the above-mentioned micro-simulation models. As Table 9 (see page 16) reveals,40 states reported compiling or using various tax-payer databases. Twenty-seven states have data-bases of individual income tax data, 18 have corpo-rate income tax databases, and 17 have sales taxdatabases. Some states maintain databases for otherselected taxes, such as, motor fuel, bank, severanceand property taxes.

In a number of states, revenue forecastersand tax analysts have access to the state’s taxpayerprocessing file maintained by the tax department.While sometimes the processing file may be of lim-ited use due to a small number of data fields, somesmaller states reported that using the total processingfile is more effective than doing their own sampling.

Conclusions

Many people have no knowledge of howstate officials derive forecasts for tax collections overa fiscal year. From where and how the numbers aredeveloped is a mystery. They see the state revenueforecaster as someone who fabricates numbers onfuture tax collection and periodically revises them.By examining the state process of revenue forecast-ing and tax analysis, clarifying who the major andsecondary players are, discussing the general fore-casting process, and examining several of the stateforecasters tools, this report unravels the mystery.

In addition, we hope this report is useful tostate policymakers and revenue forecasters by pro-viding them with a better understanding of otherstate systems. It serves as a single source of referencefor state officials, students of state taxation, andothers interested in revenue estimation. For thosewho wish additional information, a complete list ofthe respondents in each state is summarized in Ap-pendix B (see page 22).


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Micro-simulationState Model System Taxes ForecastAlabama NoAlaska Yes Mini & PC All Major TaxesArizona Yes* N/A Indiv. & Corp. Income, SalesArkansas Yes PC Indiv. IncomeCalifornia Yes +Colorado Yes MF Indiv. & Corp. IncomeConnecticut Yes PC All Major TaxesFlorida NoGeorgia Yes PC Indiv. Income, SalesHawaii Yes PC All Major TaxesIdaho NoIllinois NoIndiana NoIowa NoKansas Yes + N/A Indiv. Income

Kentucky Yes + N/A Indiv. IncomeLouisiana (Leg.) Yes MF Indiv. Income

(Exec) Yes PC All Major TaxesMaine Yes PC Indiv. IncomeMaryland Yes N/A Indiv. IncomeMichigan Yes MF & PC Corp. & Indiv. Income, PropertyMinnesota Yes PC IncomeMississippi Yes + PC Indiv. IncomeMissouri Yes + PC Corp. & Indiv. IncomeMontana Yes MF & PC Indiv. Income, SeveranceNebraska NoNew Hampshire NoNew Jersey Yes PC Indiv. IncomeNew Mexico NoNew York Yes MF Corp. & Indiv. IncomeNorth Carolina No

North Dakota Yes MF & PC Income, Oil SeveranceOhio Yes MF Indiv. IncomeOregon Yes MF Indiv. IncomePennsylvania NoRhode Island NoSouth Carolina NoTennessee NoTexas Yes MF Business Taxes & Indiv. IncomeUtah Yes MF IncomeVermont Yes PC Indiv. IncomeVirginia Limited + N/A Indiv. IncomeWashington No ?West Virginia NoWisconsin Yes + N/A Corp. & Indiv. IncomeWyoming NoDist. of Columbia NoOntario, Canada Yes + PC Indiv. Income

Mini: Mini-computer; PC: Personal computer; MF: Mainframe computer* Model was developed and is maintained by the state university.N/A: Not Available+ Model is used for tax analysis only.

Table 8Use of Micro-Simulation Models in State Forecasting


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Individual CorporateIncome Income Sales Other Taxes

Alabama X (1) X (1) X (1) Motor Fuel (1)AlaskaArizonaArkansas X XCalifornia (2) X X Bank

Colorado X XConnecticut All Major TaxesGeorgia XHawaii X XIdaho X X (3) X

Illinois (1)Indiana X X XIowa (1)Kansas XKentucky X X X

Louisiana X X X Oil & Gas Production/IncomeMinnesota XMississippi X XMissouri X X X CigaretteMontana X Other Taxes As Needed

Nebraska X X X Miscellaneous TaxesNew Hampshire (1)New Jersey X X BankingNew Mexico (1)New York X X X Banking & Insurance

North Carolina X X X Other Taxes As NeededNorth Dakota X X X Oil SeveranceOhio X Other Taxes As NeededOregon X X Other Taxes As NeededPennsylvania (1)

South Carolina X (1)Tennessee X XTexas X Franchise & Other Major TaxesUtah XVirginia X

Washington X Other Major TaxesWest Virginia X Severance, Utility, & TelecommunicationsWisconsin X X InheritanceDist. of Columbia X Property, Special Business Tax FileOntario, Canada (1)

Table 9Taxpayer Databases Used in Revenue Forecasting

(1) Analysts have access to the tax departments processing files.(2) Databases maintained by the State Franchise Tax Board.(3) A 100% sample of corporate taxpayers is keyed into the database.


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Appendix A — Sample Questionnaire

FTA Survey of State Revenue Estimation

State:

I. Office(s) primarily responsible for the state's official* revenue estimates. * note: The official revenue estimaterefers to the forecast that is the basis or controls the budget process, or if no single forecast dominates the process, the governor’sforecast.

1. How would you describe your official* state revenue estimation procedure?

Single Agency: Consensus: Other:(please describe (please describe)

-Under the Executive: membership)

-or the Legislature:

2. Please list the office, group or agency and unit therein which is primarily responsible for the state’sofficial* revenue estimates.

-Is this office/group also responsible for monitoring state revenues during the currentfiscal year?

-Number of staff who spend a substantial portion of time preparing revenue estimatesand monitoring tax collections.

3. Please list any other agencies/units which assist in making the official* revenue estimates.

Executive or NumberOffice Legislature of Staff Describe Their Participation


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II. Other participants in the revenue estimation process.

1. Does your state legislature play a role in the revenue estimation and review procedure? If yes,please describe.

2. Please list other agencies or organizations, inside or outside, or government which also preparemajor revenue forecasts in order to influence the budget process (i.e., taxpayer organizations,universities, chamber of commerce, etc.).

3. Does your state have a Council of Economic Advisors or other body who advises public officials onthe economic outlook?

4. Do your state revenue estimators consult with or make use of local university faculty or resources?If yes, please describe.


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5. Which office(s) in your state is primarily responsible for macroeconomic forecasts used for estimat-ing future revenues?

III. Revenue estimation practices.

1. Does the revenue estimate Bind the Budget? If yes, please describe any procedure to override theestimate.

2. Does your state have a formal process to review state revenue estimates? If yes, please brieflydescribe the procedure.

3. How frequently are your state’s official revenue estimates updated?

Monthly: Quarterly: Semi-Annually:

Annually: Other:

(please describe)

4. How long of a time frame does your state forecast state revenues?

-Short-term forecast: current year + years

-Long-term forecast: current year + years


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IV. Analysis of tax policy or changes in tax laws.

1. Which office(s) in your state is primarily responsible for developing estimates/analysis (fiscal notes)of changes in tax laws? Please describe the procedure.

-Approximately how many fiscal notes per year are prepared?

2. Does this office also regularly estimate the incidence of these changes?

3. Do they also estimate the economic impact (unemployment, growth, etc) of these changes?

V. Forecasting/Analytical Tools used by your state’s revenue estimators.

1. Does your state use an econometric model in making macroeconomic forecasts?

Yes: No:

-If Yes, please describe (i.e., PC or mainframe model, number of equations, etc.).

-Was it developed/maintained in house, by a commercial firm, or university?

-Please list the Major economic variables forecasted by the model:

National Variables State Variables

-If No, please describe the source of macroeconomic data.


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2. Does your state employ a micro-simulation model in revenue forecast?

Yes: No:

-If Yes, please describe (i.e., PC or mainframe model, types of taxes forecast, sample size,etc.).


3. Does your state use a computer model to forecast Sales Tax Revenues?

Yes: No:

-If Yes, please describe (i.e., PC or mainframe model, sample size, etc.).


4. Does your state maintain database(s) of state taxpayer information for use by state revenue estima-tors and policy analysts? If Yes, please describe (i.e., type of tax, file or abstract, etc.).

5. Please describe any other resources used by the primary revenue estimation office in your state (i.e.,print or data services, outside consultants, etc.).

Completed by: Phone:

Please return this questionnaire by July 30, 1991 if possible. You may respond by FAX 202/624-7888, orby mail.


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Appendix B -- Survey Respondents

Name Agency Phone Number

Charles Hines Alabama Dept. of Revenue (205) 242-1380

Chuck Logsdon Alaska Dept. of Revenue (907) 277-5627

Georganna Meyer Arizona Dept. of Revenue (602) 542-3887

Joseph D. Laface Arkansas Dept. of Fin. & Admin. (501) 682-1688

Anthony Moss California Dept. of Finance (916) 322-2263

Robert A. Affleck California Franchise Tax Board (916) 369-3420

Jeff Reynolds California Board of Equalization (916) 445-0840

Tom Dunn Colorado Dept. of Revenue (303) 866-5595

Tom Fiore Connecticut Office of Policy & Mgt. (203) 566-3960

James Francis Florida Dept. of Revenue (904) 488-2900

Henry Thomassen Georgia Governor's Office (404) 656-3890

Robert Koike Hawaii Dept. of Taxation (808) 548-7635

Michael Ferguson Idaho Div. of Financial Mgt. (208) 334-2950

Pete Gudmundson Illinois Dept. of Revenue (217) 785-0524

& William E. Hubbs

Dale Smith Illinois Bureau of the Budget (217) 782-4520

Thomas Conley Indiana Dept. of Revenue (317) 232-2104

Richard Jacobs Iowa Dept. of Revenue and Finance (515) 281-5694

Steve Stotts Kansas Dept. of Revenue (913) 296-3081

James A. Street Kentucky Finance and Administration Cabinet (502) 564-3093

Nancy Beverly Louisiana Dept. of Revenue and Taxation (504) 925-6047

William B. Gardner II Maine Bureau of Taxation (207) 289-2076

Robert D. Rader Maryland Comptroller of the Treasury (410) 974-3881

Mark P. Haas Michigan Dept. of Treasury (517) 373-2697

Nick Khouri Michigan Dept. of Treasury (517) 373-2768

John Puloquin Minnesota Dept. of Finance (612) 297-2825

Lester Herrington Mississippi State Tax Commission (601) 359-1102

Kevin Sigrist Missouri Dept. of Revenue (314) 751-9323

Steve Bender Montana Office of Budget & Program Planning (406) 444-3616

Gary B. Heinicke Nebraska Dept. of Revenue (402) 471-5695

Stan Arnold New Hampshire Dept. of Revenue Admin. (603) 271-2191

Richard Kaluzny New Jersey Div. of Taxation (609) 292-7167

Carolyn Lindberg New Mexico Taxation and Revenue Dept. (505) 827-0721

John Hudder New York Dept. of Taxation and Finance (518) 457-2990


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Name Agency Phone Number

Mike Kiltie North Carolina Office of State Budget and Mgt. (919) 733-7061

Niki Underwood North Carolina Dept. of Revenue (919) 733-4548

Kathryn L. Strombeck North Dakota Office of State Tax Commr. (701) 224-3402

Sam Nemer Ohio Office of Budget and Mgt. (614) 466-6573

Mike Sobul Ohio Dept. of Taxation (614) 466-3960

Craig A. Fischer Oregon Dept. of Revenue (503) 378-3727

Karl M. Ross Pennsylvania Dept. of Revenue (717) 783-3690

Gary Clark Rhode Island Div. of Taxation (401) 277-3050

Michael O'Keafe Rhode Island State Budget Office (401) 277-6300

Barbara A. Feinn South Carolina Board of Economic Advisors (803) 734-1550

Stanley M. Chervin Tennessee Dept. of Revenue (615) 741-2446

Tom Plaut Texas Comptroller of Public Accounts (512) 463-4260

Doug Macdonald Utah State Tax Commission (801) 530-6095

J. Tenney Vermont Governor's Office (802) 828-3322

Robert T. Benton Virginia Dept. of Taxation (804) 367-8393

Jim Schmidt Office of Forecast Council, Washington (206) 753-5603

Mark Muchow West Virginia Dept. of Tax and Revenue (304) 348-8557

Yeang Eng Braun Wisconsin Dept. of Revenue (608) 266-5773

Mary Byrnes Wyoming Dept. of Administration (307) 777-7505

Mark Gripentrog Dist. of Columbia Dept. of Finance and Revenue (202) 727-6027

David Bidner Ontario Ministry of Treasury & Econ. (416) 327-0177

`


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