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Report: Revenue Projection Errors Plague States, TX Not Immune

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Monday, March 7, 2011   

AUSTIN, Texas - When economic times are bad, mistakes tend to multiply when it comes to forecasting state revenue, according to a new report from the Pew Center on the States, and Texas has not been immune. In fact, states with biennial budgets face the toughest challenges in being accurate. Plus, Texas has been hit by double-digit declines in energy revenue, and the redesigned business tax put in place in 2006 has underperformed by more than $1 billion.

Study researcher Steve Fehr says no one expects perfection in forecasting, but "we found that more states are getting those estimates wrong during economic downturns and the errors are getting larger."

Fehr says in the case of Texas, the strong reliance on sales tax revenue is cited as one reason numbers were off, as consumers unexpectedly, drastically cut spending.

Fehr says the report, issued in conjunction with the Nelson A. Rockefeller Institute of Government, found there were a handful of states where forecasters took note of consumer behavior in the Great Recession, such as Indiana, and they issued more frequent forecasts to keep on top of looming budget gaps.

"This is all about knowing how much money you have to spend every year. If you don't know how much is coming in, it makes it difficult to deliver the services that taxpayers expect."

Fehr notes the report researchers also looked at revenue projection accuracy during economic boom times and found similar forecasting problems. He says that led some states, notably Arizona, to spend unexpected revenue on tax cuts that came back to cause problems when the recession hit.

"As the recession deepened, states didn't know from month to month how much money they had coming in, and it led to a lot of quick, hasty spending cuts."

As far as solutions, the report suggests coming up with ways to decrease reliance on volatile revenue streams. That can be done by establishing rainy day funds, and using them when revenue is down to buffer the need for budget cuts or new taxes. The Texas legislature is expected to address tapping the rainy-day fund this week.

The full report, "States' Revenue Estimating: Cracks in the Crystal Ball," is available at http://ht.ly/48R5G.


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