New Federal Tax Law Makes It Difficult for States to Provide Accurate Revenue Forecasts

Source: Lucy Dadayan, Nelson A. Rockefeller Institute of Government, April 2018

From the press release:
A Rockefeller Institute review of recent state revenue forecasts shows that states are expecting tax revenue growth to be stronger in fiscal year (FY) 2018 compared to FY 2017. Those forecasts remain highly speculative, however, as the full effects of the federal Tax Cuts and Jobs Act (TCJA) remain unknown.

The policy brief reviews forecasts for personal income, corporate income, and sales tax revenue in 42 states and finds a median forecast for personal income tax growth at 4.4 percent in 2018 and 4.7 percent in 2019 – significantly stronger than the 2.4 percent actual growth in 2017. Forecasts for corporate income and sales tax revenue are similarly strong compared to actual growth in 2017.

Forecasters in most states are facing higher-than-usual uncertainty as they do not yet have enough data to factor in the effects of the TCJA. California’s executive budget notes, for example, “These estimates do not include any impacts of the federal tax changes passed at the end of 2017…. Changes by individuals and businesses in response to the federal tax incentives will affect revenues in potentially unexpected ways.”

State revenue forecasts will continue to be updated as the effects of the TCJA become clearer.