Two Rules of Thumb

for Predicting Sales Tax Revenues

November 2012

ABSTRACT

Sales taxes are an important source of revenue for municipal governments, and the budgeting processes often require a sales tax revenue forecast. In many cases those forecasts may be made by individuals without a great deal of technical expertise in forecasting techniques. This paper develops two rules of thumb that analysts may use in constructing forecasts. First, nominal sales tax revenue growth rates change approximately point for point with nominal GDP growth. Second, oil price shocks have little effect on nominal sales tax revenues, but they do have a strong impact on the prices paid by cities for goods and services. We examine taxable sales data from two cities and find that the rules of thumb do not apply for a city that depends heavily on energy production for employment and income creation.

Steven L. Green (contact author)

Professor of Economics & Statistics

Baylor University

One Bear Place #98003

Waco, TX 76798-8003

Email: steve_green@baylor.edu

Thomas M. Kelly

Professor of Economics & Director, Center for Economic Analysis

Baylor University

One Bear Place #98003

Waco, TX 76798-8003

Email: tom_kelly@baylor.edu