Consensus Revenue Forecasting in IndianaConsensus Revenue Forecasting in Indiana PRESENTATION TO...
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PROCESS HIGHLIGHTS, STRENGTHS, AND WEAKNESSES THAT PERSIST Consensus Revenue Forecasting in Indiana PRESENTATION TO NCSL FISCAL LEADERS SEMINAR PHOENIX, ARIZONA DECEMBER 9, 2010
Transcript of Consensus Revenue Forecasting in IndianaConsensus Revenue Forecasting in Indiana PRESENTATION TO...
PROCESS HIGHLIGHTS, STRENGTHS, AND WEAKNESSES THAT PERSIST
Consensus Revenue Forecasting in Indiana
P R E S E N T A T I O N T ON C S L F I S C A L L E A D E R S S E M I N A R
P H O E N I X , A R I Z O N AD E C E M B E R 9 , 2 0 1 0
In this Presentation
Indiana’s Consensus Forecasting Process
The Strengths of Indiana’s Process
Historical Error Rates
Dealing with Data Issues
Introduction
Consensus Revenue Forecasting• Collaborative process includes both the Executive and the Legislative Branch
26 states practice consensus revenue forecasting• Consensus forecasting in most states is required by statute• Indiana does not have a statutory requirement
Forecast Errors •Reduced by using consensus forecasting•Research by Mocan and Azad (1995), Voorhees (2004), & Wallack (2005)
Budget Committee
Presentation
Overview of Indiana’s Process
Economic Forecast
Purpose Forecast Economic Variables to be Employed in the Forecast
Models of Revenue Technical Committee
Economic Forecast Committee (EFC)• Operated from the 1970s through 2008• Voluntary group of economists from the
private sector and state universities• Generated forecasts of
• Indiana Nonfarm Personal Income• US Personal Income• US GDP• US GDP Price Deflator
IHS Global Insight• Economic forecast contractor for the state
since 2009• Generates forecasts of annual and
quarterly data series for the US and Indiana
• Forecasts various economic, financial, and demographic variables
Revenue Technical Committee (RTC)
• Forecast revenue from taxes and other revenue sources of the State General Fund.Purpose
• 2 members appointed by the Governor• 4 members representing the legislative caucuses• 1 member appointed by the Senate President Pro Tempore• 1 member appointed by the Speaker of the House of Representatives
Membership
• Primary staff for the RTC• Estimates income, sales, and corporate tax forecast models• Provides other research and data analysis pertinent to the forecast
State Budget Agency (SBA)
• Provides additional staffing for legislative caucus representatives• Assists SBA staff with work on tax forecasts• Estimates forecast models for gaming, cigarette, and alcoholic beverage
taxes
Legislative Services
Agency (LSA)
Revenue Modeling
Simple econometric forecast models are employed for major state taxes: Sales Tax Individual Income Tax Corporate Income Tax Riverboat Wagering Tax Cigarette Tax Alcoholic Beverage Taxes
Forecast equations are selected based on: Standard statistical methods and procedures The RTC’s judgment about the forecast results generated by the equation
Lesser revenue streams or revenue streams not amenable to econometric techniques are estimated based on: Recent annual yields Recent growth rates
Process Strengths
Independence from the economic forecast Transparency
Minimizes the tendency to maintain outdated or incorrect
assumptions or methods
Focuses on rational/systematic forecasting methods in lieu of judgmental
forecasting
Legitimacy Eliminates dueling forecasts
Error Rates*
Forecast Year 30 Months Out 6 Months Out
2003 -4.2% -0.5%
2004 -1.1% 0.6%
2005 3.8% 1.1%
2006 2.7% 2.9%
2007 2.2% 2.1%
2008 0.4% 0.3%
2009 -9.6% -4.5%
2010 -13.4% -0.9%
Mean Percentage Error -2.4% 0.4%
Median Percentage Error -0.3% 0.7%
Mean Absolute Percentage Error 4.7% 1.6%*Forecast Error = (Actual Amount - Forecast Amount)/Actual Amount.
Forecasting and Data Issues
High Octane Statistical Models
Low Octane Data
Income Tax Forecast
Does Personal Income Predict Income Tax Revenue?
100
120
140
160
180
200
220
240
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Dol
lar
Am
oun
ts I
nd
exed
(F
Y 1
99
1 =
10
0)
Fiscal Year
Individual Income Tax Personal Income
Data Source: IHS Global Insight, Indiana Department of State Revenue
What About Stock Market Performance?
100
150
200
250
300
350
400
450
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Val
ues
In
dex
ed
(FY
19
91
= 1
00
)
Fiscal Year
Individual Income Tax S&P 500
Data Source: IHS Global Insight, Indiana Department of State Revenue
100
120
140
160
180
200
220
240
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Dol
lar
Am
oun
ts I
nd
exed
(FY
19
97
= 1
00
)
Fiscal Year
Estimated Payments Withholdings
What If We Separate the Income Tax Revenue Components?
Data Source: Indiana Department of State Revenue
Do Income Tax Withholdings Depend on Wage/Salary
Disbursements?
100
110
120
130
140
150
160
170
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Dol
lar
Am
oun
ts I
nd
exed
(F
Y 1
99
7 =
10
0)
Fiscal Year
Withholdings Wages/Salaries
Data Source: IHS Global Insight, Indiana Department of State Revenue
Data Source: IHS Global Insight, Indiana Department of State Revenue
Is There a Link Between Estimated Income Tax Payments and Stock
Market Performance?
100
120
140
160
180
200
220
240
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Dol
lar
Am
oun
ts/V
alu
es I
nd
exed
(F
Y 1
99
7 =
10
0)
Fiscal Year
Estimated Payments S & P 500 Index
Sales Tax Forecast
Do Purchasing Components Grow Like the Sales Tax Base?
50
70
90
110
130
150
170
190
210
230
250
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Dol
lar
Am
oun
ts I
nd
exed
(FY
19
91=
100
)
Fiscal Year
Sales Tax Base Nondurables Durables New Autos
Data Source: IHS Global Insight, Indiana Department of State Revenue
Contact Information
Jim Landers, Ph.D.Senior Fiscal/Program Analyst
Office of Fiscal and Management AnalysisIndiana Legislative Services Agency
Phone: (317) 232-9869Email: [email protected]
