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

68 Pages Posted: 7 Jun 2022

See all articles by Anthony Welsch

Anthony Welsch

University of Texas at Austin - Red McCombs 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: June 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 present three main findings about state tax revenue growth forecasts and state-specific aggregate public-company earnings growth. First, state tax revenue growth forecasts and aggregate earnings growth both predict future tax revenue growth, yet these two measures are not correlated. Second, adding aggregate earnings growth to a linear model that predicts state tax revenue growth with states’ own revenue forecasts increases the explanatory power of the model by a factor of 1.72. Third, aggregate earnings growth increases the explanatory power of models of all major state tax types—personal income, sales, and corporate income—and contains relevant information about future state economic activity (e.g., GDP, employment, and consumption). However, we find that the predictive power of earnings for forecasting state tax revenue growth goes beyond its usefulness in predicting general state economic indicators. Taken together, these results suggest that aggregate earnings growth is a useful and unique predictor of state tax revenues that is omitted from current forecasting models. 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? (June 1, 2022). Available at SSRN: https://ssrn.com/abstract=4125305

Anthony Welsch (Contact Author)

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

Austin, TX 78712
United States

Braden Williams

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

Austin, TX 78712
United States

Lillian F. Mills

The University of Texas at Austin ( email )

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

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

Austin, TX 78712
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
48
Abstract Views
140
PlumX Metrics