Three Strategies for More Accurate Tax Forecasting

Three Strategies for More Accurate Tax Forecasting

Tax forecasting allows states to set fiscally responsible budgets and benchmarks for funding public services. But when revenues are trending downward, like they’re expected to in the current fiscal year,  the need for accurate forecasts is even more important. And yet, many states struggle to know how much tax revenue to expect. Cannabis offers a useful example: during the first six months of collecting marijuana tax, California’s revenue was 45% lower than projected, while Nevada’s was 40% higher. 

With the right strategy and technology, though, accurate tax forecasts are within reach. To that end, let’s look at three strategies states can use to improve the accuracy of their forecasts. 

1. Data sharing and advanced analytics

At its core, tax forecasting is a data issue. It’s impossible to accurately forecast revenue without bringing together disparate data sources. In fact, empirical research has demonstrated that shared information produces more accurate forecasts. States need a data governance solution that brings together data from relevant agencies and external sources. Data governance also entails having ample security; the right policies must be in place to protect sensitive information. 

Once data is in a single repository, states can use advanced analytics to better predict revenue. Additionally, data visualizations make it easier to communicate forecasts internally and with constituents, as it’s not just the revenue figures that are important, but what those dollars are being used for.   

2. Identify noncompliance

Accurate forecasting requires identifying—and addressing—noncompliance. According to the IRS, tax fraud and noncompliance cost the country hundreds of billions of dollars per year. But with tools that leverage natural language processing and machine learning, states can rapidly analyze large data sets to identify and combat fraud.  

Arizona, for example, completed a pilot program to verify W-2 tax withholdings and discovered a whopping $5 million discrepancy. While there are nuances—such as ensuring artificial intelligence is applied equitably and choosing technology that can be integrated with existing solutions—the bottom line is that technology for fraud detection, event investigation, and insider threat alerts is non-negotiable for revenue offices around the country. 

3. Build flexibility into the model

Since tax policies change frequently,  agencies need to be thinking long-term as they implement solutions. This month, for instance, more than 32 tax policy changes took place across 18 states. Meanwhile, four states began recreational marijuana sales last year, while another four started this year. According to a recent report from PwC, 2023 is a particularly pivotal year for tax policy as states prepare to weather a potential downturn and seek out new revenue streams.  

Thus, any forecasting strategy or technology that states implement must be adaptable to policy changes. Otherwise, forecasts will be out-of-date quickly. Tax policy simulation tools play a large role in ensuring adaptability, as they can estimate revenue impacts at the state level and based on geographic, demographic, and economic factors. 

Particularly in the wake of economic uncertainty, states need the right strategies and technology in place to support their tax efforts and, in turn, their constituents. 

-Voyatek Leadership Team