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Monday Gen Session
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B-32/05 2005 Annual FTA Revenue Estimating and Tax Research Conference Summary of Proceedings To State Tax Administrators:
The 60th Annual FTA Revenue Estimating and Tax Research Conference was held October 9-12, 2005, in Oklahoma City, Oklahoma. Presiding over the conference was Mary Welsh of the Washington Department of Revenue and Chair of the FTA Research Section. Welcoming the participants was the Conference Host, Thomas E. Kemp, Jr., Chairman of the Oklahoma Tax Commission. The program included presentations by federal officials on recent trends in federal revenues and estimating capital gains. In addition, presentations were made on the federal tax reform effort and Colorado’s experiences limiting the growth of government. Mark Zandi, with Economy.com, gave a presentation on the overall and regional economic outlook. The entire day Tuesday was dedicated to various concurrent sessions covering issues of interest to state economists such as income tax forecasting issues, telecommunications tax issues, state tax reform efforts, property tax issues, corporate tax issues and the streamlined sales tax project. On Wednesday morning, the participants heard several presentations on topics of broad interest to state economists. These presentations included an analysis of the federal AMT tax on states, survey of state research agencies and an analysis of state revenue forecast accuracies. Monday Morning Mr. Platt attributes some of this volatility to large stock-options exercised during this period as wages for these higher income taxpayers grew during this period. However, most of the volatility was caused by large increases in capital gains realized during the period. Overall, Platt notes that revenue forecasters need to focus attention to the top one percentile group in understanding and better forecast future April Surprises. Larry Ozanne, Congressional Budget Office, discussed the CBO’s recent analysis of capital gains realizations and efforts to improve the agencies forecast. He began by describing the CBO forecasting process, noting how the agency actually creates two forecasts with difference methodologies. One provides an estimate for the end of the current fiscal year (latest is for FY 2005), while the second is a longer-term forecast for the 10-year budget cycle (FY 2006-15). The former uses time-series regression and current year data that is readily available. He has experimented with various time-series equations and has settled on one forecasting gains per potential output, using various investment and volume variables. The long-term forecast, on the other hand, requires CBO to actually forecast explanatory variables used in the equations. For the long-term forecast, CBO uses a Mean Reversion Method, which assumes that gains per output reverts to historical averages. It uses the GDP forecast to predict the growth rates. Ozanne has tested several other configurations, but none has proven as reliable as the mean reversion method. Ozanne concludes with the note that CBO’s work on capital gains forecasting is continuing with several papers on the topic currently available on the agency website at http://www.cbo.gov. Thomas Neubig, an analyst with Ernst and Young, discussed the recent activities of the Federal Tax Reform Commission. He noted how much of the pressure for tax reform can be attributed to the growing AMT problem, the Bush tax cuts that are scheduled to expire, and the aging workforce’s need for increased private savings. The panel was formed with the mandate to develop revenue neutral reform options that would simplify the tax laws, improve fairness, and promote long-run economic growth. At least one option must be a simplified income tax system and the options must preserve incentives for home ownership and charitable giving. While the final report of the Commission had been delayed until November, Neubig speculated on what their final proposals my look like. He believes that the commission will propose a repeal the AMT and extension of the tax cuts. This change will be paid for them by eliminating some deductions and changing the housing interest deduction to a credit. The Commission would provide savings incentives through additional back-loaded IRA’s and suggest business tax reform along the lines of Treasury’s 1992 corporate integration study. Overall, he believes that proponents will try to sell the proposed change by describing it as a means to shifting tax burden from individuals to businesses, which would be accomplished by extending some taxes to non-corporate businesses. He concludes that we will know whether he was right when the commission report is published in November. With other states looking at tax and spending limitations, Phylis Resnick, a consultant with New West Economics, discussed the political and economic consequences of Colorado’s TABOR amendment. Approved in 1992, TABOR is regarded as the most restrictive tax and spending limitation in the nation. It restricts revenue growth from all governmental entities to the population growth and the rate of inflation, requiring that any excess revenues must be returned to the voters. In addition, it required voter approval of any tax change or any policy change that increases revenues. Ms. Resnick noted that, while the TABOR initiative worked through the 1990’s, it had some problems with the 2001 recession and interaction with other limitation initiatives. The 2001 recession caused tax revenues to fall, leading to a ratcheting down of the maximum revenue baseline for TABOR. However, when revenues returned to the pre-recession level during the recovery, other limitations restricted how state officials could respond to the surplus. Thus, the state residents will be voting in November on a referendum to enable the state to keep the TABOR surplus and modify the initiative to eliminate future ratchet effects. Economic Forecasts The near-term economic outlook is trickier, with Zandi expecting real GDP growth rates to fall below three percent in 2006. Over the next two years, he projects that state and local revenue growth will slow and interest rates will rise. The strongest growth will be in the south and west, with growth rates in the northeast expected to be below the national average. While he doesn’t forecast an economic recession, Zandi noted that several factors may introduce greater uncertainty to the outlook and further decrease the growth rate. Some factors pointed out by Zandi include if energy prices remain high, a sharp correction in the housing market, or added protectionist measures in response to the trade deficit. Wednesday Morning Karl Knapp, North Carolina Department of Revenue, presented the results from a survey of state tax research offices in the tax agency. With 31 states responding, he compiled information on various functions performed by tax research offices, the number of full-time-equivalent employees devoted to each function, and different forecasting services used by the offices. He noted how as many as 26 states perform some revenue forecasting functions, while 29 do fiscal analysis of certain tax proposals. Knapp also presented detail on other functions including various statistical reporting and publications. Knapp asked researchers several questions concerning different statistical programs used, simulation models available, forecasting services subscribed, and data base functions. Indeed, he identified 12 states with data warehouse capabilities, while another 8 states reported that warehouses were under development. Finally, the North Carolina Economist examined the size of the research offices and how the research office fit in the revenue/tax agency organization. He found eight offices with 5 or less staffers, while only two had more the 20. Knapp noted how many of the smaller offices reported directly to the head of the tax agency, while others had one or more organizational layers between the tax research office and the agency director. Brian Jacobik, an economist with the Florida Department of Revenue, gave a presentation on his efforts in examining the quality of state revenue forecasts. Based on a paper by the Atlanta Federal Reserve, he chose to use a multivariate analysis to take into account both the variance and the covariance of the variable errors. Using this methodology, Jacobik was able to score the accuracy of the forecasts prepared by the Governor’s Office, the Legislature, the Department of Revenue, and the forecast agreed to by the consensus group. His analysis concludes that there is no statistical difference between the accuracies of the different forecasters. However, he found that the individual forecasts prepared by each agency were superior to the average forecast from the consensus group. Breakout Sessions On Monday afternoon, participants were offered two concurrent breakout sessions–the economic outlook for selected industries and compliance research. On Tuesday, conference participants were offered several concurrent breakout sessions. The topics included: income tax forecasting issues, corporate income tax issues, telecommunications taxes, property tax issues, state tax reform, and e-commerce tax issues. Business Meeting Papers & Presentations Sincerely, Harley T. Duncan
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