Over the past few weeks the conversation about sales tax has been pretty consistent and fairly intense. That is probably as it should be given the overall importance of revenue generation across the state right now. What have I done so far? I think the best thing to date may be the discussion surrounding the rolling twelve month series used by the city. Rather than accuracy it is more about stability. Eleven of twelve months in the series are the same from one month to the next so of course the series is stable. The flaws of this approach can be seen when you look at the recent decline. A good month is totally outweighed by the totality of the previous eleven. It also begs a statistical question: should all these months be given equal weight while in the series and then just disappear? That seems highly suspect.
I testified in front of the state legislature forecast committee at the end of July and gave my feedback on proper process improvement North Dakota could, and should, make. Each of the items I mentioned could be an entire discussion on its own which makes testimony under a time limit a bit of an issue. And then I realized, I have a blog, so I can extend my thoughts as needed. The first point to discuss further is forecast horizon.
The latest numbers from the state OMB showed some interesting information regarding taxes, again. Rather than focus on sales tax this time I thought we could branch out into income taxes. Why? Sales tax revenues get the bulk of attention in the media and from me generally and I think branching out is important. Another reason is as the impacts and effects of the oil decline transmit into other sectors more fully, and the state budget cutting starts to fully take effect, we will see other revenues exhibit declines. My interest in the overall forecasting process, if we can call it that, also means we need to branch out into other revenue areas to understand the complete picture of the revenue process. The individual income tax revenue was also almost $20 million short of the forecast in May. With that in mind here is the picture for actual versus forecast individual income tax revenues in North Dakota:
I think it hardly needs mentioning again, but I guess I will: the legislative process in North Dakota probably makes it even more important that we have some confidence in our revenue forecasts. Our legislators are meeting for three months to determine budgets for the next two years. There is always the possibility of a special session if need arises, but you want that to be the truly exceptional case. Now I am not suggesting that anyone will ever get the numbers spot on, 100% accurate, but we can get closer.
The state released an updated forecast from Moody’s today along with some slides that make little sense (found here). I would go into the details of the forecast but why bother? We have absolutely no insight into the forecast process followed, the assumptions underlying any model relationships, or even a list of variables employed and the time period considered. Seriously, if this were my forecasting class, they would fail.