MANAGING UNCERTAINTY - ncsl.org · Federal Budget Uncertainty Prospect of Long Shutdown Stokes...
Transcript of MANAGING UNCERTAINTY - ncsl.org · Federal Budget Uncertainty Prospect of Long Shutdown Stokes...
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DECEMBER 2013
MANAGING UNCERTAINTY State Options for Smoothing Revenue Volatility
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Why Does Volatility Matter?
• Influences timing and size of state budget surpluses and shortfalls
• Unpredictability confounds best efforts to craft and execute balanced budgets
• Smoothing volatility across the business cycle can lessen need for hardest budget choices
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Key Findings
There is wide variation among states in how their tax revenues align with economic performance.
State economic factors—natural resources, the range of industries, population, and other characteristics—contribute to revenue volatility.
State tax policy—what and how states tax—can magnify or moderate underlying economic sources of revenue volatility.
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-8%
-6%
-4%
-2%
0%
2%
4%
6%
1990
1991
1992
1992
1993
1994
1995
1995
1996
1997
1998
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
2010
20
11
2012
Some States Grow with the United States
Illinois Economic Performance versus United States, 1990-2012 Year Over Year Growth
Source: State coincident index, Federal Reserve Bank of Philadelphia
U.S. Illinois
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
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Other States Don’t
Source: State coincident index, Federal Reserve Bank of Philadelphia
-8%
-6%
-4%
-2%
0%
2%
4%
6%
1990
1991
1992
1992
1993
1994
1995
1995
1996
1997
1998
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
2010
20
11
2012
U.S. Alaska
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
Alaska Economic Performance versus United States, 1990-2012 Year Over Year Growth
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Economic Volatility Does Not Always Correlate with Revenue Volatility
Leas
t Ec
on
om
ic
Vo
lati
lity
Mo
st E
con
om
ic
Vo
lati
lity
40%
23%
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What Drives Revenue Volatility?
Economic Characteristics
State Tax Systems
Federal Policy &
Catastrophic Events
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What Drives Revenue Volatility?
Economic Characteristics
State Tax Systems
Federal Policy &
Catastrophic Events
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MICHIGAN
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Weak Economic Performance in the 2000s
Michigan Economic Performance versus United States, 1990-2012 Year Over Year Growth
Source: State coincident index, Federal Reserve Bank of Philadelphia
U.S. Michigan
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Ju
l-90
Apr-
91
Ja
n-9
2
Oct-
92
Jul-93
Apr-
94
Ja
n-9
5
Oct-
95
Ju
l-96
Apr-
97
Ja
n-9
8
Oct-
98
Ju
l-99
Apr-
00
Ja
n-0
1
Oct-
01
Ju
l-02
Apr-
03
Ja
n-0
4
Oct-
04
Ju
l-05
Apr-
06
Ja
n-0
7
Oct-
07
Ju
l-08
Apr-
09
Ja
n-1
0
Oct-
10
Ju
l-11
Apr-
12
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
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NEW YORK
MICHIGAN
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-6%
-4%
-2%
0%
2%
4%
6%
1990
1991
1992
1992
1993
1994
1995
1995
1996
1997
1998
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
2010
20
11
2012
Source: State coincident index, Federal Reserve Bank of Philadelphia
Economic Characteristics Shift
U.S. New York
1991 N.Y. Recession 2007 N.Y. Recession
New York Economic Performance versus United States, 1990-2012 Year Over Year Growth
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NEW YORK
MICHIGAN
NORTH
DAKOTA
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-6%
-1%
4%
9%
14%
1990
1991
1992
1992
1993
1994
1995
1995
1996
1997
1998
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
2010
20
11
2012
Specialized Economies
Source: State coincident index, Federal Reserve Bank of Philadelphia
Energy Industry Growth
U.S. North Dakota
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
North Dakota Economic Performance versus United States, 1990-2012 Year Over Year Growth
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What Drives Revenue Volatility?
Economic Characteristics
State Tax Systems
Federal Policy &
Catastrophic Events
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-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Volatile Revenues Despite Stable Economy
Source: State coincident index, Federal Reserve Bank of Philadelphia; State tax collections,
Rockefeller Institute of Government, SUNY, Albany, N.Y.
Revenue
Economy
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
Wyoming Economic Performance versus Tax Collections, 1995-2012 Year Over Year Growth
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-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Volatile Economy, Stable Revenues
Source: State coincident index, Federal Reserve Bank of Philadelphia; State tax collections,
Rockefeller Institute of Government, SUNY, Albany, N.Y.
Revenue
Economy
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
North Carolina Economic Performance versus Tax Collections, 1995-2012 Year Over Year Growth
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-15%
-10%
-5%
0%
5%
10%
15%
20%
Revenue Volatility Intensified by Housing Industry Slump
Source: State coincident index, Federal Reserve Bank of Philadelphia; State tax collections,
Rockefeller Institute of Government, SUNY, Albany, N.Y.
Revenue
Economy
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
Florida Economic Performance versus Tax Collections, 1995-2012 Year Over Year Growth
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Nevada and Consumer Spending
• State derived more than two-thirds (68%) of tax collections from three sources in 2012: General sales tax, amusements tax, and motor fuels tax
• Over 50% of tax collections in 2012 were generated by general sales tax
• General sales tax collections dropped by more than 23% between 2007 and 2010 in response to depressed consumer spending
Source: U.S. Census Survey of State Government Finances
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-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Difficult Budget Response to Recession
Source: State coincident index, Federal Reserve Bank of Philadelphia; State tax collections,
Rockefeller Institute of Government, SUNY, Albany, N.Y.
Revenue
Economy
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
Impact of Tax Increases
Nevada Economic Performance versus Tax Collections, 1995-2012 Year Over Year Growth
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What Drives Revenue Volatility?
Economic Characteristics
State Tax Systems
Federal Policy &
Catastrophic Events
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Federal Budget Uncertainty
Prospect of Long Shutdown Stokes Concern
— October 04, 2013
Handling questions, uncertainty in
debt fight — July 27, 2011
Government Shutdown Begins as Deadlocked
Congress Flails — July 27, 2011
Strained State Officials Fear Effects of
a Federal Shutdown — April 6, 2011
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The Unknown
Photo courtesy of Annysa Johnson/
Milwaukee Journal Sentinel/MCT
Photo by Tanner Christensen
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-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1990
1991
1992
1992
1993
1994
1995
1995
1996
1997
1998
1998
1999
2000
2001
2001
2002
2003
2004
2004
2005
2006
2007
2007
2008
2009
2010
2010
20
11
2012
Unforeseeable Events Can Have Outsized Impacts
Source: State coincident index, Federal Reserve Bank of Philadelphia
U.S. Louisiana Hurricane Katrina
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
11
2012
Louisiana Economic Performance versus United States, 1990-2012 Year Over Year Growth
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Complex Problems, Complex Causes
• Despite complexity, there are several common-sense approaches to managing state finances in the face of unavoidable volatility
• Many states already have policies in place that work to hedge volatility and budget risk that could be strengthened or improved
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What States Can Do
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Understanding Volatility
CHALLENGE
SOLUTION
States often lack information about what drives revenue volatility and those factors change over time
States should study their unique sources and drivers of revenue volatility
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Study Sources of Revenue Volatility
Utah’s Joint Revenue Volatility Report
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Communicate the Possibilities
CHALLENGE
SOLUTION
States will never be certain exactly how much revenue they will receive in any given year, which complicates the budget process
States may be able to improve the accuracy of their revenue forecasts by timing them closer to the final passage of the state budget
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Most Accurate Revenue Forecasts are Done Close to Budget Enactment
AR
AZ
CA
KS
MD LA
MI ME DE
MN NC HI
IA ND AK NE IL
ID OK CO NH NY
GA MO SC FL NJ OH
TX NM SD IN NV PA
AL VA VT UT KY OR RI
MT WV WY WA MS WI TN
31 to 35 26 to 30 21 to 25 16 to 20 11 to 15 6 to 10 1 to 5
Preliminary data on number of weeks the forecast is completed prior to the start of the fiscal year
Start of Fiscal Year
Source: Pew and Rockefeller Institute analysis of survey of state forecasting officials..
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Counter the Cycle
CHALLENGE
SOLUTION
Revenue volatility causes extensive year-to-year variation in the resources available to state governments
States should redesign their reserve funds to smooth budgets across the business cycle
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Counter the Cycle Virginia