Term Paper: Revenue Estimates: Underestimation of Revenues

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[. . .] Table 1: Underestimation of Tax Revenues in the State of Florida (in $ millions)

08-09

Actual

09-10

New forecast

Change from old

10-11

New forecast

Change from old

11-12

New forecast

Change from old

12-13

New forecast

Change from old

Sales tax

16531.4

15871.1

16759.0

18133.7

19434.6

Beverage tax & licenses

7.2

6.0

5.4

5.2

Corporate income tax

2,216.8

1,833.4

93.2

1,848.2

70.2

2,015.6

49.1

2,144.7

28.8

Documentary stamp tax

20.3

23.3

2.1

(78.1)

(Source: Florida Revenue Estimating Conference, 2010, n.pag)

Table 2: Underestimation of Federal Grant Revenues (Urban Areas Security Initiative Grant) in the State of Florida

Year

Actual Grant Award

Forecasted Amount

Forecast Error

($millions)

Forecast Error Percentage

2007

$84,742,600

$57,613,272

$27,129,328

32%

2008

$77,483,211

$28,481,684

$49,021,527

63%

2009

$72,345,392

2,138,613

$70,206,779

97%

(Source: OIG, 2011, p. 7)

Table 3: Underestimation of Total General Revenue Fund in Florida ($ millions)

08-09

Actual

09-10

New forecast

Change from old

10-11

New forecast

Change from old

11-12

New forecast

Change from old

12-13

New forecast

Change from old

Total Revenue

21,623.8

21,566.4

22,857.8

24,652.3

26,417.9

91.4

(Source: Florida Revenue Estimating Conference, 2010, n.pag

What is causing the Errors?

i) Resourcing

Current Practice

In the case of the federal government, the responsibility and the locus of revenue sharing are separate and distinct (Klay 1992). The responsibility for economic forecasts in the executive lies with the CEA (Council of Economic advisors), "but it is the Office of Tax Analysis (OTA) of the treasury department that prepares the revenue forecasts that underlie the president's budget recommendation" (Klay, 1992, p. 233). In the legislative branch, the CBO (Congressional Budget Office) and the JCT (Joint Committee on Taxation) prepare separate revenue estimations, though the latter is often regarded "the only official source of revenue estimates during congressional debate" (Klay, 1992, p. 233).

The State of Florida, like many others, operates a pattern that is markedly similar to that of the federal government (Klay, 1992; FCFEP, 2010). Neither of the two branches has revenue forecasting as its exclusive prerogative; however, revenue forecasters on either side relate their forecasts with those of the other (FCFEP, 2010). In this regard, the state can rightly be said to be a step ahead of the federal government. However, although members from the two branches interact, the state does not have a formal procedure for such interaction, and the forecasts often have to compete for the senate's acceptance (FCFEP, 2010; Klay, 1992).

Issues and Improvements

Klay (1992) expresses that jurisdictions should strive to create consensus among the two branches of revenue forecasting because under such an approach, "underlying assumptions are likely to be questioned within the context of the forecasting process rather than on the floor of a legislature" (p. 234). Furthermore, jurisdictions could advocate for independent forecast because these are often better-placed to identify, and bring to light questionable underlying assumptions (Klay, 1992). Competing forecasts with no clear-cut means of reaching consensus create room for partisan interests, and are "likely to be motivated more by political agendas than by the desire to improve accuracy" (Klay, 1992, p. 234).

Jurisdictions ought to review the resourcing and structure of their forecasting activity, and ensure that it i) takes into account and ensures the succession of the knowledge/skill transfer of revenue forecasting staff; and ii) allows for an ongoing research program focusing on emerging issues and trends in the revenue forecasting field (Department of Treasury and Finance, 2006).

ii) Methodology

a) Taxation Revenue

Current Situation

Florida's publication of estimates cut-off dates are determined in the mid-year review and the State Budget. The conveyance duty estimate over the budget year reflects judgment about turning points and cyclical patterns; economic growth and population projection; and some external advisory (FCFEP, 2010). The conveyance duty estimates include a separate 'specials' component covering transactions generating assessments exceeding $1 million (FCFEP, 2010). The growth of mortgage duty is assumed to keep close track of conveyance duty.

Issues and Improvements

It is evident from the data presented earlier on that underestimates of conveyance duty, sales tax and corporate income tax, and total taxation revenue are a major source of forecast error in Florida. Thanks to these consistent underestimates of taxation revenue, underlying growth has proceeded for long periods, norming at 27.3% over the last decade (Rockefeller Institute, 2011). For this reason, the state has "been through a period of believing 'this is the peak year', only to discover otherwise" (Department of Treasury and Finance, 2006, p. 17).

Increasing the use of expert views by, for instance, increasing the frequency of consultation with market property leaders would be crucial for informed judgment (Rockefeller Institute, 2011). However, the Department of Treasury and Finance (2006) warns against over-relying on such views at the expense of fact-monitoring, and puts forth financial institutions as a more objective source of information. To this end, expert views should not be used as the primary basis for revenue forecasts; rather, they could be used as a source of "timely, anecdotal information that could be used in testing the forecasts and helping to identify risks" (Department of Treasury and Finance, 2006, p. 17).

The validity of the incremental, escalation-based budget-derivation process has been questioned in the past, with the assumed relationship between the growth variable and the tax base attracting the most controversy (Department of Treasury and Finance, 2006). An ongoing program of monitoring and revising could be used in place of the current one-off review process (Department of Treasury and Finance, 2006). Such an approach would provide avenues for jurisdictions to integrate economic and revenue forecasts; and consequently, "to estimate long-term or underlying revenue collections independently of current year collections" (Department of Treasury and Finance, 2006, p. 17).

b) Federal Grants:

Current Situation

National grant revenue estimates and Florida's share of this estimate are both crucial inputs into the forecast of federal grants. The latter reflects per-capita relativities recommended by the various grant commissions. Each state's shares are dispatched by the various commissions before the finalization of the budget year estimates.

Issues and Improvements

National grant revenue estimates have been found to be a significant source of error in regard to revenue forecasting (Pew/Rockefeller Institute, 2011). The timing of Florida's budget often implies that the state has to rely on dated fiscal outlook and mid-year economic forecasts, both of which are usually published almost three months before the state budget's cut-off date (Pew/Rockefeller Institute, 2011). Improving the federal grant revenue estimates would require that either the state be developed to carry out its own forecasting, or the release of federal grant estimates be made timelier (Pew/Rockefeller Institute, 2011). Moreover, the state could closely monitor the actual monthly grant collections and check for clear variations between the national pool and the forecasts (Pew/Rockefeller Institute, 2011). Integrating the federal grants system budget and collection information into a single analytical report on the state's tax collections could be an effective way of achieving this.

iii) Governance

Current Practice

Forecasts prepared by both branches are vetted through the individual branches' quality control and internal reporting processes. However, the Pew/Rockefeller Institute (2011) notes that this vetting role is at times transferred to sub-contracted agencies, with the branches only retaining the quality assurance role.

Issues and Improvements

Given the weight of the revenue estimation process and its significance to the development and administration of budgets; one could rightly argue that the current reporting relationships, roles, and responsibility framework is a little too ad hoc (Department of Treasury and Finance, 2006). The current framework, though based on a consensus approach, allows for only limited consultation across divisions, and cannot, hence, be relied upon to guarantee not only the consistency but also the accuracy of the forecasts' underlying assumptions, especially with regard to expenses, economic variables, and revenues (Department of Treasury and Finance, 2006).

Concern has also been raised on the current framework's ability to accommodate the views and ensure the equal participation of all relevant quarters. The framework somehow provides room for the "perceived tendency to rely heavily on particular individuals during the preparation of forecasts" (Department of Treasury and Finance, 2006, p. 31). This over-reliance on a few individuals endangers the continuity of forecasting activity and also increases the risk of informed forecasts going untested (Department of Treasury and Finance, 2006).

Jurisdictions ought to formalize reporting relationships and responsibility frameworks both within the revenue-estimating conference, and the legislative branch (Pew/Rockefeller Institute, 2011). Moreover, hierarchical reviews ought to be properly-developed and implemented within each process area (Pew/Rockefeller Institute, 2011). This formalization should be spread over to various other centers in the forecasting process, including those availing or supplying estimates for sales revenues, specific purpose payments, mining royalties, and individual taxes.

A forum with membership representation from the Legislative Office of Economic and Demographic Research, the House of Representatives, the Senate, the Governors' office, and the Legislative Budget Commission, could be developed to continually monitor and share information on emerging revenue trends (Department of Treasury and Finance, 2006). On the… [END OF PREVIEW]

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