Do Accounting Earnings Provide Useful Information for State Tax Revenue Forecasts?
74 Pages Posted: 7 Jun 2022 Last revised: 14 Apr 2023
Date Written: December 1, 2022
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: Suggested Citation