State Revenue Forecasts and Political Acceptance: The Value of Consensus Forecasting in the Budget Process

Abstract

Concerns about political biases in state revenue forecasts, as well as insufficient evidence that complex forecasts outperform naive algorithms, have resulted in a nearly universal call for depoliticization of forecasting. This article discusses revenue forecasting in the broader context of the political budget process and highlights the importance of a forecast that is politically accepted—forecast accuracy is irrelevant if the budget process does not respect the forecast as a resource constraint. The authors provide a case illustration in Indiana by showing how the politicized process contributed to forecast acceptance in the state budget over several decades. They also present a counterfactual history of forecast errors that would have been produced by naive algorithms. In addition to showing that the Indiana process would have outperformed the naive approaches, the authors demonstrate that the path of naive forecast errors during recessions would be easily ignored by political actors.

Often Wrong, Never Uncertain: Lessons from 40 Years of State Revenue Forecasting

“…Mikesell and Ross (, 3–5) explain that “[t]he underlying objective of the method is to produce a single forecast that emerges from cooperation between legislative and executive branches, thereby producing a reliable and accepted budget constraint for development of state expenditure programs.” The Indiana system goes further than some other states by requiring the inclusion of both political parties in the process, so it is not just an executive/legislative consensus but also a political consensus, and by involving the consensus group in construction of the method to be used for the forecast, not just having various interests bring forth their preferred forecasts for each tax and then fighting it out to get agreed numbers. The process thus binds both branches of government and both political parties in the creation of the forecast.…”

An Open Systems Model of Local Government Forecasting

“…The literature on state and local government forecasting has followed two streams (Bretschneider & Schroeder, 1985; Mikesell & Ross, 2014; Sun, 2005). The first stream has attempted to identify the methodology used in government forecasting, whether trend models or more advanced econometric and time-series methods (e.g., Bretschneider & Gorr, 1987; Frank, 1990; Frank & Zhao, 2009; McNichol, 2014; Shkruti, 1990).…”

“…Rodgers and Joyce (1996) provide evidence that forecast accuracy becomes more optimistic during economic expansion but becomes more conservative during downturns at the state level from 1975 through 1992. Empirical evidence for this relationship has remained relatively limited through fiscal crises over the past decade, with only one article demonstrating decreased forecast accuracy at the state level through the Great Recession (Mikesell & Ross, 2014). This finding proves relevant given the broad consensus that both 2001-2002 and Great Recession were exogenous shocks to state and local government decision making (Scorsone & Plerhoples, 2010).…”

The Other Six: Governors Without The Line‐Item Veto

“…Indiana revenue estimates are prepared in two stages, a forecast of the economic outlook for the state based upon several macroeconomic factors, and a translation of those macroeconomic factors into projections for state tax and revenue sources. The Indiana outlook forecast is done by a private contractor (Landers ; Mikesell and Ross , 194). The second stage of the forecast is done by the Revenue Forecast Technical Committee (RFTC) which is comprised of the Director of Tax Revenue from the SBA, majority and minority staff members from the House Ways and Means Committee and Senate Finance Committee and a tax economist from a state university (Mikesell and Ross , 191).…”

“…The Indiana outlook forecast is done by a private contractor (Landers ; Mikesell and Ross , 194). The second stage of the forecast is done by the Revenue Forecast Technical Committee (RFTC) which is comprised of the Director of Tax Revenue from the SBA, majority and minority staff members from the House Ways and Means Committee and Senate Finance Committee and a tax economist from a state university (Mikesell and Ross , 191). The RFTC produces consensus forecasts based not only on executive and legislative representation but also involvement of representatives of both political parties as well as use of a single agreed upon methodology to produce the forecast (Mikesell and Ross , 195).…”