ABSTRACT
Two primary questions to be answered in the governmental budget-making process are how much revenue can be anticipated in the upcoming budget period(s) under existing tax laws and how much can be anticipated if there are tax law changes. The first question refers to revenue forecasting, the second to revenue estimating or “scoring.” This entry considers both revenue forecasting and revenue estimation. Each is especially critical for state and local governments that, by law, must operate under balanced budgets. Institutional responsibilities for revenue forecasting at the federal, state, and local levels are discussed including consensus forecasting in which the executive and legislative branches jointly produce the revenue forecast. The range of methods used at all levels of governments to forecast and estimate revenues and caveats as to their use are reviewed as are forecasting errors that can be determined using measures of forecast bias and forecast accuracy. Several issues that pertain to scoring the impact of specific tax law changes are summarized including static vs. dynamic scoring, interaction among multiple tax rule changes, and the time horizon used in the estimate.
