Volatility in state tax revenue led to recession forecasting errors.

• Position: News & Numbers

Increases in state revenue forecasting errors during the recent recession were driven by increases in revenue volatility, according to a new technical report from the Nelson A. Rockefeller Institute of Government. States overestimated revenues by more than 10 percent in fiscal 2009, the largest forecasting error since 1987, the earliest year data were available.

While forecasts are often more difficult during and after recessions, errors near the 2001 and 2007 recessions were much worse than those near the recession of the early 1990s, suggesting that revenue volatility is increasing.

State Tax Revenue Forecasting Accuracy examines how revenue forecasting errors have changed in recent years and examines the relationship between revenue forecasting accuracy and tax revenue volatility, timing and frequency of forecasts, and forecasting institutions and processes. The report looks at state estimates for three major revenue sources--income, sales and corporate taxes--which represent around three-quarters of states' total tax revenues. The research covers the period from 1987 to 2013, a 27-year span that includes three recessions and three economic expansions.

Key findings from the report include:

* Growth in forecasting errors appears mostly attributable to growth in tax revenue volatility, which in turn was driven by increased reliance on increasingly volatile capital gains.

* Corporate income tax...