An Evaluation of the State of Iowa Revenue Forecasts, 1995 – 2017

A critical task in establishing the State of Iowa budget is to project available tax revenue. The 2017 fiscal year was characterized by tax revenues that did not live up to predictions, leading to midyear cuts in planned government expenditures and tapping into reserves. That experience raises the question of whether the Iowa state government revenue forecasts are faulty. Are revenue shortfalls avoidable through improved forecasts or are occasional shortfalls inevitable with even the best statistical predictions? I will show that the Iowa government revenue forecasts pass the standard tests of unbiasedness and rationality, meaning that they are not obviously flawed. However, policies that have increased the proportion of tax revenues that are refunded are making our tax system less efficient. Moreover, forecasts of net tax revenue have become less reliable, leading to increased likelihood of revenue shortfalls and midyear cuts in planned government services