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Government Revenue Forecasting

Understand the impact of economic and policy changes on your tax revenue

State and local economies are constantly evolving with changes in economic structure, industry mix, demographics, public policy and unforeseen economic shocks ultimately shaping the uneven flow of government revenues.  However, as regional economies become increasingly intertwined, events previously thought of as irrelevant or far-flung can now have direct local level impacts. Everything from new tariffs to changing consumer spending to new import patterns can influence local government revenue. For example, weakening economic growth in key Asian economies may weaken export demand for producers in your area. Fluctuating exchange rates and new tariffs may curtail ability for producers to meet demand or influence consumer spending.

Bottom line? Basic trend models that take a one-dimensional view of geographies without holistically incorporating local, national and global impacts and perspective are insufficient to reliably predicting government revenues.

As a strategic partner to state and local fiscal leaders, we work with our clients to quantify how economic and policy changes impact their jurisdictions’ capacity to plan, budget and deliver vital public services. We work closely with city, county, and state budget officers and legislative leaders to inform their revenue estimating and budget process by providing independent forecasts of tax and non-tax revenues that help fiscal process stakeholders achieve better rigor and consensus.  We develop our  custom tax revenue forecasting models by deriving statistical relationships between changes in the levels of individual tax  receipts (e.g. personal and corporate income taxes, sales and use taxes, etc.) and trends in the key economic variables that generate the revenues.

Sample deliverables

  • Forecasts of tax receipts and key drivers leveraging global inputs
  • Access to underlying driver data
  • Access to models
  • Analytical report describing factors influencing the forecasts
  • Scenario analyses that compare revenue effects of alternative policies and rates
  • Interactive client portal

Methodology highlights

We develop econometric equations and then construct a model to forecast sales and use taxes by sector, personal or individual income taxes on wages and non-wage income, corporate income taxes, excise taxes, and property taxes. Model equations use our proprietary economic and demographic forecasts as inputs. We then use our econometric expertise to estimate statistically significant equations, unique to each jurisdiction and tax type being consider, that explain tax revenue levels over time based on trends in our forecast variables. Similar approaches are also deployed to forecast receipts from non-tax sources such as license fees, room charges, user fees, and tolls on transportation infrastructure.

To project the local tax revenues, we couple our tax models with our detailed forecasts of the macroeconomic, state, MSA and local economies incorporating such variables such as wage and salary disbursements, personal income, retail sales, consumer expenditures by type of good or service including motor vehicles, unemployment rate, value added by sector, output, population change, and home prices. One major IHS Markit competitive advantage in forecasting state and local government revenues is that we already have econometric forecasting models for states and MSA with historical and forecast values for all the major economic and demographic variables that drive government revenues. We then develop and link to them a module that explains the econometric relationships between tax collections and changes in economic activity.  Another advantage is that we use a top-down approach in developing our state and MSA forecasting models. As a result key variables from our energy, industry, US macroeconomic, and global economic forecasts are automatically considered when the state and MSA models are run.

Our state econometric forecasting models already contain a number of variables that are essential to forecasting different types of tax revenues, including: total personal income, wage and salary payments by 2-digit NAICs code, two categories of retail sales, new passenger and light truck vehicle registrations, 21 types of personal consumption expenditures, the CPI, state and local personal tax payments, shipments of manufactured goods and industrial production.  The models also contain, as applicable in an individual state, current tax rates for nine types of major state-level taxes. 

Because of the way our state and MSA forecasting models are designed, and the software used to run them, they can easily be modified to compare the revenue effects of alternative tax policies such different rates, types of goods and services subject to a tax, even alternative economic growth scenarios.  

Our methodology for forecasting government revenues is shown in the flow chart presented below. The figure clearly shows how we leverage all our information and forecasting assets to derive government revenue estimates that are driven by levels of economic activity at the regional, state, US, and global levels. 

Why IHS Markit?

Linkages
We understand the impact that events abroad can have on local receipts. Our forecast models are fully linked to enable us to quantify changes occurring thousands of miles away on your community.
Expertise
IHS Markit has over 1,200 world class experts and researchers and 1,400 industry analysts. Our Economics & Country Risk team alone has over 200 economists, country risk analysts, and consultants. We have extensive experience working in the revenue forecasting space, serving numerous countries, states, cities and counties.
Concept coverage
We provide more than 150 indicators per state, metro, and county, 360+ US MSAs, over 1,000 indicators for the US and 5 million international historical economic and financial time series. Our global models cover between 250-800 indicators per country, enabling us to work with the indicators that truly drive your results.
Accuracy
IHS Markit is consistently recognized as the most accurate forecaster for the US economy. Inaccurate forecasting costs you money and causes misappropriation. You can’t afford to be wrong.
Industry intelligence
By leveraging expert analysis across IHS Markit, we can assess industry events and trends and provide our clients with a clearer view of how the ripple effects will be felt throughout the United States.

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