Friday, October 9, 2015

Kansas Tax Revenue Estimates: Are They Accurate?

One of the key arguments in my home State of Kansas right now is about tax revenues.  I've posted on this before, but there's a general argument about the correct tax strategy (more sales? income? consumption? property?).  There's also a more short-term argument: under the current tax plan, will we take in enough money for the budget created this year (FY 2016, July 2015-June 2016).  This blog post will evaluate the accuracy of the revenue estimates, and following posts may seek to refine the revenue estimates.

BUDGETING BACKGROUND

To explore whether we'll have enough money for this year, we're actually asking another question, which is, are the consensus revenue estimates accurate?  Here's how the process works in a nutshell:
Legislators create a budget with a certain max spending amount plus a little safety margin (called an ending balance), determined by an estimate of tax revenue for the next year.  How are those revenue estimates determined?  In Kansas, we get a bunch of smart people together who look at tax policies and rates, the health of the economy, etc, and determine how much money the State will come in each year.
The question here, thus becomes, how right or wrong are the smart people.*

*As someone who makes projections for the living, I'm well aware of how wrong supposedly smart people can be about projects.


PERFORMANCE OF ESTIMATES

I compared the Kansas consensus revenue estimation group's initial estimates for each year (annualized, not monthly estimates) to the actual outcomes.  The data I used ended in FY 2014, so 2015 is not shown.  But I am really just wanting a historical evaluation, if that data becomes available I'll add it to my charts.   A lot of data visualization here, but also some numbers; what do those numbers look like?


The numbers track together, as we would expect, but visually (read: ocular regression) we see greater variance in recent years.  But that greater variance could be just because we're dealing with larger numbers.  We should really look at this on a percentage basis, like this:



This is actually a fascinating chart, because it points out clearly three "low revenue" misses:  1983 (early 80's recession), 2002 (early 2000's recession), and 2009/2010 (2008 recession).  There are also policy changes tied up in this bit of history, and if you know more about the history of tax policy that might cause any of these volatilizes please comment below.

Another thing that stands out, is that there are relatively few multi-year, non-recession associated negative misses, with none occurring since the mid-1980s.  The misses in 2013 and 2014 (and 2015, not shown) are relative anomalies in that sense.  

Is there another way to look at how accurate revenue estimates are, smoothing for negative misses and bad years?  Here's a five year-moving average version, that looks at absolute deviation.  


That last view is telling, because it shows that over time, the revenue estimates are off by an average of 5.1% negative or positive.  The current amount of "slack" in the budget is $100 million.  By way of comparison, we would expect the average year to by off by about 5.1% or $300 million on current budgetary numbers.  In essence, it's quite likely we could see an overrun of that slack.

CONCLUSION

Some takeaway bullet points:
  • The revenue estimates historically are fairly accurate, however have an average "miss" of 5% annually.  That 5%, if negative would overrun the current budgetary slack.
  • The largest negative misses historically are associated with major recessions.  But we have seen three consecutive estimate misses, outside of recession conditions.
  • The miss in the last three years is uncharacteristic, as non-recession (ended in 2009) multi-year misses.  That's not good, and could point to something inherently flawed in the revenue estimates.


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