In an earlier blog, we described the challenges businesses face when a new product, service, or competitor enters the market and changes the rules of the game. To help you imagine the challenge, we asked you consider the absurd scenario of athletic teams formed to compete in unknown sporting events. Well, we want to shift to a different topic and, in doing so, ask you to consider another absurd scenario. What would it be like to play basketball (or volleyball for that matter) on a floating dock? What would it be like to dribble and shoot when the floor keeps bopping up and down with the waves?
Well forecasting state revenue collections is a little like executing a jump shot on a floating dock, and a March 2015 PEW Charitable Trusts report explains why (Managing Volatile Tax Collections in State Revenue Forecasts).
For starters, the problem isn’t with the forecaster. Just as the floating dock makes it harder for the shooter to time his or her shot, volatile tax revenues make it hard for forecasters to accurately estimate annual revenue totals, making it harder for state officials to prepare realistic budgets.
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.
