WASHINGTON — States have been making more serious errors in estimating their revenues during tough economic times, according to a new report by the Pew Center on the States and The Nelson A. Rockefeller Institute of Government. This has significant implications for policy makers who need to know how much money they will have to spend on programs and services as they grapple with severe budget shortfalls.
The report, States’ Revenue Estimating: Cracks in the Crystal Ball, found that in fiscal year 2009—the first of the ongoing budget crisis—half the states overestimated revenues by at least 10.2 percent. That equated to an unexpected shortfall of nearly $50 billion in personal income, corporate income and sales tax revenues. In a year when state policy makers faced $63 billion in mid-year shortfalls—coming atop $47 billion they already had closed when crafting their budgets—this was a significant challenge. States had to close the gaps by cutting spending, increasing taxes and fees, tapping reserves and borrowing.
The study found that the primary culprit driving more serious and frequent errors is not the states’ processes, methods and techniques, but rather, the increasing volatility of the revenue streams themselves. This appears to result from states’ growing reliance on income taxes and the ways in which highly fluctuating capital gains affect income tax revenue.