Overestimating Tax Revenue Hurts Vulnerable Populations

Posted on April 10, 2013 | Type: Press Release
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Contact: Lucy Caldwell
(602) 633-8986

Better government practices will protect programs and services during next recession


If you lost your job today, would you go on a spending spree like there was no tomorrow? Of course you wouldn’t. Yet that’s exactly what state policymakers chose to do with state coffers when the recession hit and they failed to face up to the economic downturn, continuing to accept sunny revenue forecasts that never came to be.

In a policy report released Wednesday, Goldwater Institute economist Byron Schlomach, Ph.D., explains how inaccurate government revenue forecasts during the recession led to serious budget woes for states, many of which are still working to fix bad financial decisions made during that period.

Accurate revenue forecasting is essential because it determines how much money will be spent on government programs and services like schools and roads. If a state overestimates revenues and doesn’t collect enough tax money to fund the budget, programs and services are cut or taxes are raised.

Politics are often to blame for revenue overestimation, according to Dr. Schlomach. “It’s not realistic to think that the politicians who are out door-knocking for votes are also going to be the bearers of bad news to taxpayers,” says Dr. Schlomach.

As the recession raged in Arizona, revenue estimates overstated actual revenues so badly that it became clear state leaders were failing to acknowledge reality. Between 2006 and 2011, there was not one year in which policymakers estimated revenues might be lower the next year, even as tax collections were dropping by double-digit percentages. In 2009, estimated revenue overstated actual revenue by more than $2 billion, a 24 percent error.

“No one likes austerity measures, but ultimately policymakers have to face up to budget realities sooner or later,” says Dr. Schlomach. “It is far worse to promise people a program they become reliant upon and then pull the rug out from under them down the line. With more accurate revenue forecasting, we will budget for programs and services we can afford in the long-run.”

Dr. Schlomach recommends seven reforms to improve the accuracy of revenue estimates, including requiring multiple revenue estimates, an independent estimate from someone outside the government; increased frequency of publicly released estimates; and budgeting practices that strictly prioritize programs.

Dr. Schlomach also advocates that states adopt spending limits based on inflation and population growth. During the last recession, states with spending limits in general were forced to recognize the economic downturn earlier and as a result didn’t overestimate revenue as badly as states without limits. Budget cuts were less severe over the course of the recession in states whose spending was not allowed to rapidly expand during the housing boom.

To read the report, please visit: http://goldwaterinstitute.org/article/no-more-rainy-days-how-make-state-revenue-estimates-more-accurate

To arrange an interview with Byron Schlomach, please contact Communications Director Lucy Caldwell at (602) 633-8986.

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