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Understanding Forecasting Errors in State Personal Income Tax Revenues: The Role of Capital Gains

Author

Listed:
  • Asa Ferguson
  • Liam Marshall
  • Jonathan C. Rork

Abstract

Many states face challenges in producing accurate forecasts of tax revenue from personal income. Using data from 1996 to 2019, we look at how growth in the various base components of personal income influence the accuracy of a state's forecast of revenue from personal income taxation. We consistently find growth in capital gains, which has the highest year-to-year volatility among personal income components, to be associated with a state underestimating its actual revenues from personal income by at least 2 percentage points.

Suggested Citation

  • Asa Ferguson & Liam Marshall & Jonathan C. Rork, 2023. "Understanding Forecasting Errors in State Personal Income Tax Revenues: The Role of Capital Gains," Public Finance Review, , vol. 51(5), pages 649-668, September.
    • Handle: RePEc:sae:pubfin:v:51:y:2023:i:5:p:649-668
    DOI: 10.1177/10911421231168724
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    References listed on IDEAS

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    1. William R. Voorhees, 2006. "Consistent underestimation bias, the asymmetrical loss function, and homogeneous sources of bias in state revenue forecasts," Journal of Public Budgeting, Accounting & Financial Management, Emerald Group Publishing Limited, vol. 18(1), pages 61-76, March.
    2. Estelle P. Dauchy & Christopher Balding, 2013. "Federal Income Tax Revenue Volatility Since 1966," Working Papers w0198, Center for Economic and Financial Research (CEFIR).
    3. Estelle P. Dauchy & Christopher Balding, 2013. "Federal Income Tax Revenue Volatility Since 1966," Working Papers w0198, New Economic School (NES).
    4. Dye, Richard F. & McGuire, Therese J., 1991. "Growth and Variability of State Individual Income and General Sales Taxes," National Tax Journal, National Tax Association;National Tax Journal, vol. 44(1), pages 55-66, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    revenue forecast errors; capital gains taxation; state personal income taxation;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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