Do accounting earnings provide useful information for state tax revenue forecasts?

Anthony Welsch (), Braden Williams () and Lillian Mills ()
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Anthony Welsch: The University of Chicago
Braden Williams: The University of Texas at Austin
Lillian Mills: The University of Texas at Austin

Review of Accounting Studies, 2025, vol. 30, issue 1, No 21, 813-859

Abstract: Abstract State tax revenue forecasting is critical to states’ fiscal planning because many states have constitutions or laws that require a balanced budget and restrict borrowing to fund deficits. We develop and compare four measures of aggregate corporate earnings growth. We find that a state-specific industry-weighted measure of earnings growth predicts future state tax revenue growth, incremental to states’ actual forecasts (i.e., it increases explanatory power by a factor of 1.86). Earnings growth also improves states’ component forecasts of personal income, sales, and corporate income tax revenues. We also find that both forecast errors and lagged earnings growth can explain midyear spending cuts, suggesting that there are real consequences to omitting earnings growth from tax revenue forecasts. Because accurate revenue forecasts are necessary for the efficient allocation of government resources, these findings should be useful to those who prepare, monitor, or are otherwise affected by state tax revenue forecasts and budgets.

Keywords: Revenue forecasts; State taxes and financial reporting; Corporate tax; Sales tax; Revenue estimation; H24; H25; H71; M41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-024-09840-w

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