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ABSTRACT. State-level revenue forecasts tend to be based not only on financial conditions, but also on political considerations. The relationship between these two factors can be uncovered when analyzing budget forecast errors. Typically, revenue forecast errors are assumed to follow a normal distribution; however, this research finds that political factors skew the distribution of errors. The further into the future the forecast is made, the more biased the budget becomes. This research tests the impact of political factors on long-range, state-level revenue budget forecasts. The findings provide significant evidence that connects the financial management of a state with its governing patterns. Political factors cause more forecasting errors on long-term budget projections than on shorter term estimates. The paper evaluates differences in the magnitude of the states’ revenue budget forecast errors, for both long- and short-term forecasts, based on the timing of the next election; the strength of party control of state government; and the distribution of power within the state government. The time period covered in this study is from 1991 to 2010. Data used to test this hypothesis was provided by NASBO, the U.S. Department of Commerce, Bureau of Labor Statistics, state election data from State Registrars, and partisan distributions of the executive and legislative branches from the state legislatures and governors’ offices. pp. 180–195

Keywords: state-level, revenue budget forecast error, fiscal uncertainty

MICHAEL J. BROGAN
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Rider University

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