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

• Date: 01 September 2018
• Published date: 01 September 2018
• DOI: http://doi.org/10.1111/puar.12954

Often Wrong, Never Uncertain: Lessons from 40 Years of State Revenue Forecasting 795

Public Administration Review,

Vol. 78, Iss. 5, pp. 795–802. © 2018 by

The American Society for Public Administration.

DOI: 10.1111/puar.12954.

Often Wrong, Never Uncertain:

Lessons from 40 Years of State Revenue Forecasting

Abstract: Experience in state revenue forecasting humbles and educates the public finance scholar and can inform

the public administrator. It teaches the limits of econometrics, the importance of disaggregation, the significance of

tax administrators, the utility of causal models, the issue of data problems, the need to understand tax structure, the

importance of consensus forecasts, the terror of recessions, and the reality of being wrong. In the Indiana consensus

system, experience provides greater respect for public servants seeking to make a sustainable fiscal system function and

probably contributes to making the revenue forecast binding in the budget process.

Evidence for Practice

• Revenue forecasts can be made binding in the budget process through the design of the forecast process,

although a history of acceptable accuracy, not necessarily of perfection, helps.

• Revenue forecasting can be done successfully in a transparent way.

• Acceptable quality forecasts are not particularly the product of sophisticated modeling techniques.

• Revenue forecasts can be quite accurate in the long term, but lawmakers and public administrators need a

strategy for dealing with recessions because accuracy deteriorates during those periods.

A

budget is a plan for raising and using money

for a future period. Unless the spending

planned is based on some idea of how

much money will be available, the budget will be

equivalent to a child’s Christmas list given to Santa

Claus. A defined forecast of how much revenue

will be available makes the budget meaningful.

Thus, the revenue forecast is the linchpin for a

sustainable fiscal program. No state, regardless of

the stringency of any balanced budget requirement

that limits its expenditure to revenues collected or its

dexterity at evading these requirements, can survive

over the long haul if its revenue cannot cover its

expenditures. In any year, the forecast establishes the

maximum amount to be appropriated, and states may

appropriate all the way to that limit. Hence, attention

to the revenue forecast is critical.

Some have described this forecasting as guessing with

math, but however it works, the forecast presents the

baseline for development and execution of the plan for

government service. To provide greater transparency

of this important process, this article presents lessons

that the author has learned over 40 years of experience

in the preparation of the revenue forecast for the state

of Indiana, a unique opportunity for the practice

of government finance that may yield insights for

both academics and public administrators inside

and outside the finance sphere. The article makes no

claim that the system in Indiana should be the model

for any other government. What is appropriate for

any jurisdiction must be based on the facts of that

jurisdiction in terms of its economy, its governmental

structure, and its politics, and grafting the process

from another place would not be sensible. However,

the lessons from observations about the forecasting

function in Indiana may be useful elsewhere.

It should be noted that the Indiana revenue

forecasting process, although not copied from

anywhere, is somewhat typical. As explained here,

the process is based on a consensus model, as is the

case for exactly half of the American states (Rueben

and Randall 2017). The approach is not an outlier,

although there are some special features. In addition,

the accuracy of the Indiana forecasts in comparison

with those done by other states appears to be generally

in the middle of the pack or slightly above (Boyd,

Dadayan, and Ward 2011; Rogers and Joyce 1996).

The System and Its Origins

The Indiana revenue forecasting system is the product

of process failure in the mid-1970s. Importantly, it

was the process that failed, not that the prior system

was yielding particularly inaccurate revenue forecasts.

Divided government characterized the 1975 legislative

John L. Mikesell

Indiana University

John L. Mikesell is Chancellor’s

Professor of Public and Environmental

Affairs Emeritus, Indiana University. The

author thanks the other members of

the Indiana Revenue Forecast Technical

Committee for insights into how

governments work and for their desire to

produce the best possible forecast, plus

their tolerance for the author’s bad jokes.

The article is the sole responsibility of the

author and does not necessarily reflect the

views of any other institution or individual.

E-mail: mikesell@indiana.edu

Viewpoint

Stephen E. Condrey

andTonya Neaves,

Associate Editors