Do Accounting Earnings Provide Useful Information for State Tax Revenue Forecasts?

74 Pages Posted: 7 Jun 2022 Last revised: 14 Apr 2023

See all articles by Anthony Welsch

Anthony Welsch

University of Chicago - Booth School of Business

Braden Williams

University of Texas at Austin - Department of Accounting

Lillian F. Mills

University of Texas at Austin - McCombs School of Business; The University of Texas at Austin

Date Written: December 1, 2022

Abstract

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 develop and compare four measures of aggregate corporate earnings growth and find that a state-specific, industry-weighted measure is the best predictor of future tax revenue growth, yet is not correlated with state tax forecasts. Earnings growth increases the explanatory power of total state tax revenue forecasts by a factor of 1.72, and also improves forecasts of each major tax type (i.e., personal income, sales, and corporate income). Finally, we find that both forecast errors and lagged earnings growth can explain midyear spending cuts, suggesting that there are real consequences to omitting earnings growth from tax revenue forecasts. 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.

Keywords: revenue forecasts, state taxes and financial reporting, corporate tax, sales tax, revenue estimation.

JEL Classification: H24, H25, H71, M41

Suggested Citation

Welsch, Anthony and Williams, Braden and Mills, Lillian F. and Mills, Lillian F., Do Accounting Earnings Provide Useful Information for State Tax Revenue Forecasts? (December 1, 2022). Available at SSRN: https://ssrn.com/abstract=4125305 or http://dx.doi.org/10.2139/ssrn.4125305

Anthony Welsch (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

Braden Williams

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

The University of Texas at Austin ( email )

McCombs School of Business
1 University Station B6400
Austin, TX 78712-0211

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