Understanding Forecasting Errors in State Personal Income Tax Revenues: The Role of Capital Gains

Abstract

Many states face challenges in producing accurate forecasts of tax revenue from personal income. Using data from 1996 to 2019, we look at how growth in the various base components of personal income influence the accuracy of a state's forecast of revenue from personal income taxation. We consistently find growth in capital gains, which has the highest year-to-year volatility among personal income components, to be associated with a state underestimating its actual revenues from personal income by at least 2 percentage points.