October 28, 2015
Forecasting Revenue in Volatile Times
The revenues are volatile because they are generated by different kinds of economic transactions, like earning a wage, buying a car, making goods, or delivering services. The revenue these taxes generate rises and falls with the frequency and value of these transactions, which are sensitive to ups and downs of the national and, in many states, global economy.
For example, it was relatively easy to predict sales tax revenues “because purchases of such things as food and toiletries typically hold steady regardless of the economy’s performance.” But during the last recession, consumers cut spending even on these items. Even more significantly, consumers continued to spend at relatively low levels even after the recession ended. Particularly vulnerable are states that mainly tax car, boats, and other big-ticket items.
States could stabilize their revenue flows by drastically changing their tax structures, but that’s not likely to happen, according to the study, because the changes “come with trade-offs between competing tax policy priorities and significant costs.” But they could do more to manage volatile revenue.