States Overestimated Receipts–Pew

The Pew Center on the States and the Rockefeller Institute of Government have released a report which says that states overestimated the amount of money they would bring in by an aggregate 10% in 2009. This caused a short fall of $50 billion. Such a large discrepancy shows why states deficits ballooned. Most states thought there would be money in their treasuries which never materialized.

The report says “Collections from personal and corporate income and sales taxes still are hard to predict in a shifting economy.” That is because it is impossible for states to accurately forecast what will happen to national GDP in the next year or two. The Pew report does not mention that the federal government and almost all economists face the same problem.

The Pew document also shows that state budget directors have gotten worse at their jobs over time. The Pew-Rockefeller report, citing the volatility of state taxes, concluded that the size of the estimating errors grew progressively worse during the last three economic downturns: 1990-92, 2001-03 and 2007-09.

That is not really telling since the most recent recession was deeper than any other in nearly eight decades and was not expected by even the most skilled analysts. Forecasts probably deviated more as events become larger and more disruptive than expected.

The Pew report may have one positive effect that state financial officials will be more cautious in the future when they forecast receipts. But, it does not take a report to encourage this behavior. The extreme downturn of the last recession is enough to give them a significant dose of caution.

Pew will probably issue a similar report a decade from now. States will go back to over estimating revenue. So will the federal government. Improvement in GDP will cause most bureaucrats at all levels of government to raise income forecasts again. That will lead to an increase in spending as legislatures and governors attempt to satisfy the ever-present demands of voters for programs to help people improve their daily lives and the prospects of their business.

Pew can file the new report in a drawer and dust it off in a few years.

Douglas A. McIntyre