Review of Revenue
Introduction
A budget is a financial sketch of how an entity will receive and allocate resources for a fiscal period. A Budget is intended to establish a framework for the distribution of resources of an entity or organization to its departments, groups, and subsidiaries in order to realize its definitive goals. A budget comprises of all-inclusive details concerning the use of resources in a given period, the way in which the resources will be used and distributed, the sources of the resources, and the expected returns. It also includes the policies and decisions governing the organization. Budgets are an important tool in promoting accountability. Governments plan to tax the citizens only what it intend to utilize. The government is able to prioritize its functions and allocate the available resources accordingly.
In a government setting, the budget designed is a reflection of its policies the period in which the budget is determined. Budgets are designed at the various levels of the government, as the government is supposed to predict its expenses and represent its activities in monetary terms and plans are formulated on the scarce resources that will be allocated to achieve the set objectives and goals. In U.S, the budgetary system gives an opportunity for the president and Congress to make a decision on how to spend revenue, how much to spend on what, and how to collect and generate revenue that they have planned to use (Blondal, Kraan & Ruffner, 2003, p.15). For proper preparation of a budget, revenue estimation is a key thing especially with State and local government. Various models that are used to forecast and estimate revenue include qualitative methods, time-series methods, econometric modeling, and micro-simulation modeling. This paper considers the Federal budget, State budget, local budget, and agency budget with an emphasis on the sources of revenue, their similarities, and differences. It also looks at the revenue estimation and forecasting models and ways of improving them to minimize error that occurs.
The Federal Budget
The federal budget summarizes the expenditure and revenue echelons for a particular fiscal year, which normally starts in October and ends in September. The budget process is founded on the Congress Budget Act of 1974, which involves the steps that ensures that both the executive and the legislature play their roles in shaping the budget. Budget preparation starts when the president submits the budget proposal to the Congress. The proposal contains the presidential goals and priorities for the next fiscal year. It shows the allocation of resources to government functions and agencies (Hunddleston, 2005, p.6). It also includes the total outlays and receipts in line with the current and prospectively of the economic situations.
Congress reviews the proposal before adopting a budget resolution. It can alter, disapprove, or approve the proposal. The resolution sets the guidelines for the expenditure and revenue that the Congress will adhere to when passing appropriations, tax laws, and approvals. The appropriations and entitlement laws gives the federal government a legal framework to allocate and spend funds. The Office of Management and Budget (OMB) oversees the disbursement of funds from the treasury to the government agencies (Blondal, Kraan & Ruffner, 2003, p.17). OMB also ensures appropriate and effective utilization of the funds by the government agencies.
The Local Budget
In U.S, there is diversity in local government. Some represents cities while others represent rural areas. In this case, local government budgets shows diversity too. In most local governments, their budget is divided in three but interconnected parts. They include annual operating budget, capital budget, and utilities budget. The annual operating budget outlines the estimated expenditure by the municipal agencies. It also outlines the estimated revenue to be collected in the fiscal year. The capital budget lays out the expected expenditure on infrastructure developments that has long benefits. This is arrived at after careful planning that outlines the amount to be spent on capital projects. The utilities budget involves the estimated spending on public services such as water supply. The utilities expenditure normally finance themselves – annual costs equals annual revenue- though sometime operating subsidy may be allocated (Hunddleston, 2005, p.5).
The process of preparing local government budget starts with the person mandated to oversee the process, he/she identifies the parameters and gives instructions to departmental heads. Using the provided instructions and parameters, departments provide their budget estimates for the next fiscal year. The mandated local government officer then reviews the submitted department budget proposals. Then the consolidated local budget is forwarded to the legislative body for review and approval. After approval, the Property Tax Levy is calculated. This tax is used to balance the budget after other revenue sources are taken into consideration. In other instances, the federal or state government can delegate some functions to the local government without providing implementation funds. In this regard, other desired services and facilities can end up being neglected due to scarcity of resources.
The State Budget
The process begins when Governors file their budget proposals to the House of Representatives in January. The House Committee on Ways and Means reviews the budget proposal and gives recommendations to the House. The House reviews the report and adopts it, after which it is sent to the Senate for approval. In case there are differences between the Senate and House amendments and proposals, a committee is formed by the two legislative branches which harmonizes the amendments before present them to both the House and Senate for approval. The approved Budget is then presented to the Governor who accepts it or vetoes it. The final budget is generally referred to as General Appropriations Act for the next fiscal year.
The Agency Budget
The OMB guides agencies on how to strategically plan and prepare budgets. The agencies prepare and submit their proposals to the OMG. OMG reviews the proposals, modifies them, or approves them. The OMG then consolidates the individual agency budget proposals to draft the final budget that is filed to the Congress for approval.
Differences and Similarities
Differences:Fiscal deficit – budgeted spending exceeds revenue estimation – differentiates the federal, state, and local governments. It is a requirement that the State and Local governments balance their budgets. On the other hand, the federal government is permitted to operate on a deficit and to borrow to meet its objectives. The federal government plays a major role in the national economy with crucial budgetary consequences. It has the mandate to coin, issue, and monitor money circulation in the Federal Reserve, meaning the federal government can print more money during a crisis. Both State and Local governments cannot print money. The federal government regulates the state of the economy by setting the rate of interest. This is crucial in controlling inflation and boosting economic growth during stagnation and recess periods (Blondal, Kraan & Ruffner, 2003, p.20). Both the State and Local governments have no control over rate of interests and inflation. The federal government is responsible in funding the Military and requires a huge allocation. The State and Local governments have much smaller roles mainly funding the State guards. The source of revenue also distinguishes the federal government from both the State and Local governments. The federal collects major taxes although the State and Local government have a wide range of options for revenue collection (DiNapoli, 2008, p.8).
The budget preparation procedures are almost the same for the various governments. The executive branches of the respective governments are the one responsible for drafting the budget proposal after collecting estimates from various own departments. The budget proposal is subject to review and approval by the legislative body.
Sources of Revenue
The Federal Government:
The federal taxes are the main source of revenue. Te taxes include individual and corporate Income tax, Capital Gain taxes, Excise Duties, Social Security taxes, and Inheritance taxes. Other sources of revenue include borrowings through the sales of treasury bills and bonds.
The State Government:
The State governments get their revenues from intergovernmental transfers where the federal government disburses some of its revenue to state governments. It may be inform of direct grants that have restriction or grants for performance of a service. Taxes are another source of revenue. Taxes include Sales tax, estate tax, fuel tax, Special tax from certain products or services such as Tobacco and Alcohol. Licensing is also a source of revenue – business licenses, driving licenses, public utilities. Taxing on lottery and gambling.
Local governments:
Intergovernmental transfers are a source of revenue. Local taxes that include property tax and sales tax are a source of revenue (DiNapoli, 2008, p.8). Special Assessment such as school districts, mosquito districts, business improvement districts is another source of revenue.
Public budgeting formats
For a long time governments have used various formats when preparing budgets. Various budgeting techniques are available. They include line-item budgeting, performance budgeting, program and planning budgeting, zero-based budgeting, and site based budgeting among others.
Line Item Budgeting:
It is the most widely used model due to its simplicity and control orientation. It outlines the units on which revenue will be directed but does not necessarily specify what to be done. Source of revenue is normally connected with the unit of spending. Expenditures are based on previous spending and revenue. It gives elasticity in terms of controlling resources depending on the level of spending. This model offers a number of advantages. It is easy to set up, and requires relatively simple skills. It is also easy for administrators. However, it is criticized in that it presents minimal data to policymakers on the activities of the organization units.
Performance Budgeting:
The expenditures are based on the costs of individual activities or units in an organization. The entire budget is the summation of individual costs of units. It is said to be more superior compared to Line Item model because it gives useful information that can be considered by the legislature and used by administrators (fiu.edu). It also includes a description of individual units. In this case, the budget is organized into quantitative projections of costs and undertakings with its focus being the measurement and evaluation of outcomes. However, it has some drawbacks. Lack of consistent data inherent in a department is a big hitch.
Program and Planning Budgeting (PPB):
It is a transitional model line item and performance model. It comprises four stages. Planning is the first and goals of the program are set. The second stage is programming, in this case, various alternatives that can accomplish the set goals are identified. The third stage is the evaluation, here benefits and expenses are evaluated for the various options, and finally, there is the implementation stage whereby the best options are selected and implanted (fiu.edu). This model links the project being considered and ways of assisting it. It is intended for long term planning whereby policymakers are made aware of future impacts of their decisions. Budgeting is based on mini projects rather than grater consolidated units. It explains long-term expenditure of the project and compares it with alternative approaches that may be used to arrive at the goals. Generally, they are used in capital projects and aids in explaining how these projects will be funded. Some of the limitations in the use of this model is change in long-term goals, inadequate data on costs and projects, and complexity in the management of projects.
Zero-Based Budgeting:
The budget is planned by partitioning government activities into individual decision units. Together with each unit is the cost at various level of implementation. In this model, all departments are required to preserve their programs and substantiate their existence every year. The heads of individual departments are required to demonstrate the different levels of service that they can provide under various funding levels – zero funding inclusive. They are also required to show alternatives and cost to be incurred in each level of funding. After evaluation, the departmental units are leveled according to their significance in contribution of the set goals and objectives. The main thrust of this model is to eliminate obsolete services and expenditures and concentrate resources to the most pressing areas. This is good approach to the federal government budgeting because only the departments that have been given priorities will be allocated funds.
Site-Based Budgeting:
This model puts more emphasis on decentralization of decision-making process. It creates a site based budgeting approach where local staffs are involved in the process making them accountable to the maintenance of the budget as well. The major advantage of this model is that it gives those who understand the functions of a department the power to allocate revenue. Decentralizing budgetary process fosters local accountability and promoting participation in budget development.
New Performance Budgeting: this is outcome oriented under the Government performance act of 1993. It tries to connect the sharing of resources with management performance. In this case, government agencies are supposed to prepare a five-year tactical plan and include a performance guide as well. The other is balanced budget. In this case, revenue exceeds expenditure. Deficits from a particular fiscal year are not transferable to another fiscal year. State and local government commonly use this form because they are required to formulate balanced budgets (fiu.edu). This cannot apply to the federal government because it has the mandate to spend more than its revenue.
The Supply Side Economics:
This model suggests a reduced government participation in the economy that is; economy should be less regulated and low taxation. It considers tight regulation as unhealthy because it limits corporate entrepreneurship while high taxes are said to take away money that could have been used for investment.
Future Revenue Projections
The budget deficit is projected to grow due to the increase in spending for Social Security and the health care initiatives. The federal revenues are projected to grow to about 20% of the GDP compared to the current 17%, which will be fostered, by the continuing economic revitalization and alterations of the tax law (DiNapoli, 2008, p.5). The federal expenditure is estimated to grow by 69% over the ten years with an annual growth of $2.4 trillion. The mandatory spending is projected to grow at about 79% for the next ten years while the discretionary budget is expected to grow by 17%.
Revenue Prediction and Estimation
Predicting revenue is a crucial component of the budget making process. For Governors and the legislature to make informed decisions on how to allocate funds to particular projects or whether to raise or reduce tax rates, they have to be aware of the amount of revenue they are working with. Those responsible in planning the budget must know how much revenue is anticipated in the upcoming fiscal year under the existing tax laws and when the laws are altered. Two types of revenue prediction include revenue forecasting and revenue estimation. Prediction of baseline revenue under existing tax laws is referred to as revenue forecasting. Revenue estimation is the prediction of the impacts of the changes of specific tax laws (Rubin & Mantell, 2003, p.1057).
In the federal government, both the executive and legislature are responsible in preparing revenue forecasts and revenue estimations. In the executive, the Office of Tax Analysis (OTA) sets revenue forecasts and estimation for the Office of Management and Budget – responsible in the formulation of the federal budget. In the Congress, Congressional Budget Office (CBO) is responsible in preparing the baseline revenue forecasts and estimates and evaluating the impact of certain revenue expenditure proposals. The House and the senate Budget Committees uses the CBO’s revenue forecasts and estimates to prepare both their annual budget resolutions and directives to other Congressional Committees. The Joint Committee on Taxation (JCT) determines the impacts of revenue of projected tax law alteration. The Congress cannot put into consideration any proposal to change tax law legislation without a note from the JCT (Rubin & Mantell, 2003, p.1058). The Joint Committee Staff utilizes the confidential tax returns data to set up revenue estimates.
State Governments: Amongst the states, the responsibility for revenue forecasting differs. For instance, in 17 states, the executive is responsible for preparing the state revenue forecast while in 22 states; a consensus process is used to reach at the final forecast. In this case, a consensus group comprises of the executive and legislative representatives, private sector, and university sector. Consensus tends to produce forecasts that are more precise. The revenue estimations are tabled to the legislature as fiscal statements appended normally to the tax bills. The statements are prepared either by the executive agency mandated for revenue forecasts or by the executive branch. In some of the states, legislative branch members may also be mandated to develop revenue estimates.
In most local governments, the executive branch is the one responsible for preparing revenue forecasts. Conversely, in bigger cities, legislative members are involved in preparing revenue forecasts while in some municipalities, academicians and other consultants outside the local government may be given the task.
Revenue Estimation and Forecasting Methods
There are four ways used by the various government to estimate and forecast revenue. They include qualitative methods, time-series methods, econometric modeling, and micro-simulation modeling. The Qualitative methods of predicting revenues rely on expert reports and opinions. However, few government agencies use it exclusively on these judgments to arrive at the revenue forecasts and estimates; but rather, it is used to alter the results of more official quantitative estimation and forecasting methods. A general application of this approach is consensus forecasting whereby information from various sources is used to reach a final revenue projection.
Time-Series Methods: in this approach, data on revenues in the previous fiscal year(s) are utilized to predict the impending year(s). This method has four approaches, which include simple trend analysis, autoregressive approach, mixed technique approach, and analysis of seasonal fluctuations. The first three approaches are used for future predictions of revenue estimation and forecasting while the last one is used to foresee revenue within the budgetary year. The simples’ trend assumes that the revenues in the fiscal year being forecasted will grow in the same rate as in the previous year. Others assume that the revenue will grow at the same average rate of the previous year. The complex trend uses auto-regression approach whereby the prediction is made from weighted average of previous year outcomes with a random interruption term for the current fiscal period (Rubin & Mantell, 2003, p.1058). The main pro of time-series approach is due to their limited data that is required compared to other approaches.
Economic models: these are mathematical illustration of an economic incident. Econometric technique varies from the time-series analysis in that it is founded on implicit relationships between variables rather than change in time. Econometric technique may involve a single equation, a set of equations solved recursively, or set of equations solved simultaneously. In recursive model, forecasted data for independent variables are fed into the system and no response for the dependent variables while in simultaneous model, there is response. Various concerns need to be resolved when applying econometric models, which include forecast of the fundamental economic variables, included in the approach, solving collection hitch, defining the tax base, and tuning legislative alterations during the period. Another issue is the fundamental relationship among economic activities and tax collection. The other issue arises due to lack of appropriate data in measuring tax base particularly with state and local governments. The final issue to consider relates to the alterations in tax rates.
Micro-simulation models: this approach uses data from a chance test of digitized individual taxpayer returns and a tax calculator to predict the performance of a taxpayer. The use of micro-simulation technique in estimating the impact of specific tax law alterations can be achieved in three ways: altering the tax parameters, altering the coding of tax calculator, and by altering both. Some of the issues to be addressed in this model include ensuring that the taxpayer has paid the taxes in the year being referenced (Rubin & Mantell, 2003, p.1059).. The data have to be updated with respect to taxpayer’s base and be customized to include changes in tax laws.
The four models can be used separately to estimate and forecast revenue. However, due to the limitations linked to each model, many governments combine various methods in forecasting and estimating revenue more precisely.
Selecting Revenue Forecasting and Estimation Methodology
Federal government: the OTA, CBO and JCT rely primarily on micro-simulation and econometric model for revenue forecasting and estimation. In case these models are not accurate, other techniques are used. The Congress compares the various revenue estimates and adopts one of them. The estimation of certain tax law alterations during Congressional considerations of tax laws, the JCT gives the executive revenue estimates. Although, sometimes the executive branch may opt to use Treasury estimates to make decisions whether to support a proposal or not.
State governments: States utilize various estimation and forecasting methods. Time-series analysis is commonly used in forecasting revenue for some taxes- stable taxes. Most states use more than one model to estimate and forecast revenue. Most local governments rely on qualitative models due the paucity of data.
Errors in Revenue Estimation and Forecasting
Because Estimations and forecasts are made under an uncertain climate, possibility of error occurrence is inevitable – overestimating or underestimating revenues. Overestimating predicted revenue has a more pain politically than underestimating projected revenue. State are required to balance their budgets and have to reimburse their overestimations by increasing tax rate, reducing expenditure on certain projects, or using their reserves. When overestimation of revenue takes place, policy makers have limited time to give feedback. This is because revising tax rates upwards requires time to arrive at political agreements or finding new sources (Rubin & Mantell, 2003, p.1059). Similarly, opting to reduce budget for other projects requires time for the policymakers to determine the advantages and harm that will be caused for various projects.
Underestimates on the other hand can be challenging as well, depending on the decision arrived to utilize the extra revenue. When there are surpluses at the end of the fiscal year, legislators can opt to reduce the rate of taxation, which limits the revenue growth that may be required in the future in controlling revenue cuts to some projects. The legislature can also opt to undertake extra projects, which will prove to be hard to continue financing in the future.
The area in which variable uncertainties arise is predicting how taxpayers adjust their behaviors following tax laws alterations. When tax laws are altered, normally there are shifts on the relative prices and expenditure that taxpayers face either as manufacturers or as consumers. In reaction to these changes, taxpayers opt to change their behaviors, which largely affect the tax base. This will affect the revenue estimation because the tax to be collected depends not only on the imposed rate but also on tax base variable.
Ways of Enhancing Revenue Estimation and Forecasting
Revenue estimation can be enhanced by finding ways of dealing with the complexities involved in forecasting revenue and in case the errors do occur, they do so minimally in a portion that they do not disrupt the budget process. One way is by analyzing the errors from previous revenue estimations and refining the assumption made. Another way is making regular revenue estimation and forecasting. The refined estimates are utilized to prepare the final budget. Ensuring freedom from the politicking the process. Addition of extra expertise can also reduce the error in revenue estimation.
For accurate and more realistic revenue estimates, the net effects of the tax changes must be considered. The collective impact of tax alterations and government expenditure changes the behavior of taxpayers. These behaviors are crucial as they affect the tax base when determining revenue estimates (Rubin & Mantell, 2003, p.1059). To arrive at realistic revenue estimates and forecasts, an analytical method that recognizes response to changes in tax alterations from both individuals and businesses.
Conclusion
The process of budgeting is critical in ensuring that the scarce resources are allocated well in a way that the interests of the public are put into consideration. The process is almost the same for all level in government structure with the executive branch formulating the budget that is subject for approval by the legislative branch. Budget creates accountability of the allocated funds. Choosing the best budgetary approach in preparing budget is critical. The state and local governments are required by law to balance their budget unlike the federal government that can expand its finance from various sources such as borrowing or altering the interest rate or printing more money. Taxes are a major source of revenue at all levels of governance.
The significance of meaningful revenue estimates and forecasts for an excellent budget and formulation of economic policies requires major alterations in the revenue estimation and forecasting methodologies that are currently used by both the executive and legislative branches of government. These revenue-estimating methods ignore the impact of tax changes misrepresent the results of the alterations on tax revenues. The consequence of misrepresenting information is erroneous revenue estimates. The policymakers make decisions that are not in line with the correct estimates. To have better approaches in preparing the best policies, the methods and analytical approaches in revenue estimation process need to be improved.
References
Blondal J. R., Kraan D. J., & Ruffner M. (2003). Budgeting in the United States. Joutnal on
Budgeting. 3(2): 1-30
DiNapoli T. P. (2008). Understanding the Budget Process. Local Government and School
Accountability. 1-17
Hunddleston J. R. (2005). An Introduction to Local Government Budgets. 1-30
Rubin M. M. & Mantell N. (2003). Revenue Forecasting and Estimation. Encyclopedia of
Public Administration and Public policy. 1057-1060.
Fiu.edu, (n.d). Public Budgeting and Financial Management. Retrieved from.
<http://www2.fiu.edu/~ganapati/3003/budget.html >
Review of Revenue
Name:
Institution:
Review of Revenue
Introduction
A budget is a financial sketch of how an entity will receive and allocate resources for a fiscal period. A Budget is intended to establish a framework for the distribution of resources of an entity or organization to its departments, groups, and subsidiaries in order to realize its definitive goals. A budget comprises of all-inclusive details concerning the use of resources in a given period, the way in which the resources will be used and distributed, the sources of the resources, and the expected returns. It also includes the policies and decisions governing the organization. Budgets are an important tool in promoting accountability. Governments plan to tax the citizens only what it intend to utilize. The government is able to prioritize its functions and allocate the available resources accordingly.
In a government setting, the budget designed is a reflection of its policies the period in which the budget is determined. Budgets are designed at the various levels of the government, as the government is supposed to predict its expenses and represent its activities in monetary terms and plans are formulated on the scarce resources that will be allocated to achieve the set objectives and goals. In U.S, the budgetary system gives an opportunity for the president and Congress to make a decision on how to spend revenue, how much to spend on what, and how to collect and generate revenue that they have planned to use (Blondal, Kraan & Ruffner, 2003, p.15). For proper preparation of a budget, revenue estimation is a key thing especially with State and local government. Various models that are used to forecast and estimate revenue include qualitative methods, time-series methods, econometric modeling, and micro-simulation modeling. This paper considers the Federal budget, State budget, local budget, and agency budget with an emphasis on the sources of revenue, their similarities, and differences. It also looks at the revenue estimation and forecasting models and ways of improving them to minimize error that occurs.
The Federal Budget
The federal budget summarizes the expenditure and revenue echelons for a particular fiscal year, which normally starts in October and ends in September. The budget process is founded on the Congress Budget Act of 1974, which involves the steps that ensures that both the executive and the legislature play their roles in shaping the budget. Budget preparation starts when the president submits the budget proposal to the Congress. The proposal contains the presidential goals and priorities for the next fiscal year. It shows the allocation of resources to government functions and agencies (Hunddleston, 2005, p.6). It also includes the total outlays and receipts in line with the current and prospectively of the economic situations.
Congress reviews the proposal before adopting a budget resolution. It can alter, disapprove, or approve the proposal. The resolution sets the guidelines for the expenditure and revenue that the Congress will adhere to when passing appropriations, tax laws, and approvals. The appropriations and entitlement laws gives the federal government a legal framework to allocate and spend funds. The Office of Management and Budget (OMB) oversees the disbursement of funds from the treasury to the government agencies (Blondal, Kraan & Ruffner, 2003, p.17). OMB also ensures appropriate and effective utilization of the funds by the government agencies.
The Local Budget
In U.S, there is diversity in local government. Some represents cities while others represent rural areas. In this case, local government budgets shows diversity too. In most local governments, their budget is divided in three but interconnected parts. They include annual operating budget, capital budget, and utilities budget. The annual operating budget outlines the estimated expenditure by the municipal agencies. It also outlines the estimated revenue to be collected in the fiscal year. The capital budget lays out the expected expenditure on infrastructure developments that has long benefits. This is arrived at after careful planning that outlines the amount to be spent on capital projects. The utilities budget involves the estimated spending on public services such as water supply. The utilities expenditure normally finance themselves – annual costs equals annual revenue- though sometime operating subsidy may be allocated (Hunddleston, 2005, p.5).
The process of preparing local government budget starts with the person mandated to oversee the process, he/she identifies the parameters and gives instructions to departmental heads. Using the provided instructions and parameters, departments provide their budget estimates for the next fiscal year. The mandated local government officer then reviews the submitted department budget proposals. Then the consolidated local budget is forwarded to the legislative body for review and approval. After approval, the Property Tax Levy is calculated. This tax is used to balance the budget after other revenue sources are taken into consideration. In other instances, the federal or state government can delegate some functions to the local government without providing implementation funds. In this regard, other desired services and facilities can end up being neglected due to scarcity of resources.
The State Budget
The process begins when Governors file their budget proposals to the House of Representatives in January. The House Committee on Ways and Means reviews the budget proposal and gives recommendations to the House. The House reviews the report and adopts it, after which it is sent to the Senate for approval. In case there are differences between the Senate and House amendments and proposals, a committee is formed by the two legislative branches which harmonizes the amendments before present them to both the House and Senate for approval. The approved Budget is then presented to the Governor who accepts it or vetoes it. The final budget is generally referred to as General Appropriations Act for the next fiscal year.
The Agency Budget
The OMB guides agencies on how to strategically plan and prepare budgets. The agencies prepare and submit their proposals to the OMG. OMG reviews the proposals, modifies them, or approves them. The OMG then consolidates the individual agency budget proposals to draft the final budget that is filed to the Congress for approval.
Differences and Similarities
Differences:Fiscal deficit – budgeted spending exceeds revenue estimation – differentiates the federal, state, and local governments. It is a requirement that the State and Local governments balance their budgets. On the other hand, the federal government is permitted to operate on a deficit and to borrow to meet its objectives. The federal government plays a major role in the national economy with crucial budgetary consequences. It has the mandate to coin, issue, and monitor money circulation in the Federal Reserve, meaning the federal government can print more money during a crisis. Both State and Local governments cannot print money. The federal government regulates the state of the economy by setting the rate of interest. This is crucial in controlling inflation and boosting economic growth during stagnation and recess periods (Blondal, Kraan & Ruffner, 2003, p.20). Both the State and Local governments have no control over rate of interests and inflation. The federal government is responsible in funding the Military and requires a huge allocation. The State and Local governments have much smaller roles mainly funding the State guards. The source of revenue also distinguishes the federal government from both the State and Local governments. The federal collects major taxes although the State and Local government have a wide range of options for revenue collection (DiNapoli, 2008, p.8).
The budget preparation procedures are almost the same for the various governments. The executive branches of the respective governments are the one responsible for drafting the budget proposal after collecting estimates from various own departments. The budget proposal is subject to review and approval by the legislative body.
Sources of Revenue
The Federal Government:
The federal taxes are the main source of revenue. Te taxes include individual and corporate Income tax, Capital Gain taxes, Excise Duties, Social Security taxes, and Inheritance taxes. Other sources of revenue include borrowings through the sales of treasury bills and bonds.
The State Government:
The State governments get their revenues from intergovernmental transfers where the federal government disburses some of its revenue to state governments. It may be inform of direct grants that have restriction or grants for performance of a service. Taxes are another source of revenue. Taxes include Sales tax, estate tax, fuel tax, Special tax from certain products or services such as Tobacco and Alcohol. Licensing is also a source of revenue – business licenses, driving licenses, public utilities. Taxing on lottery and gambling.
Local governments:
Intergovernmental transfers are a source of revenue. Local taxes that include property tax and sales tax are a source of revenue (DiNapoli, 2008, p.8). Special Assessment such as school districts, mosquito districts, business improvement districts is another source of revenue.
Public budgeting formats
For a long time governments have used various formats when preparing budgets. Various budgeting techniques are available. They include line-item budgeting, performance budgeting, program and planning budgeting, zero-based budgeting, and site based budgeting among others.
Line Item Budgeting:
It is the most widely used model due to its simplicity and control orientation. It outlines the units on which revenue will be directed but does not necessarily specify what to be done. Source of revenue is normally connected with the unit of spending. Expenditures are based on previous spending and revenue. It gives elasticity in terms of controlling resources depending on the level of spending. This model offers a number of advantages. It is easy to set up, and requires relatively simple skills. It is also easy for administrators. However, it is criticized in that it presents minimal data to policymakers on the activities of the organization units.
Performance Budgeting:
The expenditures are based on the costs of individual activities or units in an organization. The entire budget is the summation of individual costs of units. It is said to be more superior compared to Line Item model because it gives useful information that can be considered by the legislature and used by administrators (fiu.edu). It also includes a description of individual units. In this case, the budget is organized into quantitative projections of costs and undertakings with its focus being the measurement and evaluation of outcomes. However, it has some drawbacks. Lack of consistent data inherent in a department is a big hitch.
Program and Planning Budgeting (PPB):
It is a transitional model line item and performance model. It comprises four stages. Planning is the first and goals of the program are set. The second stage is programming, in this case, various alternatives that can accomplish the set goals are identified. The third stage is the evaluation, here benefits and expenses are evaluated for the various options, and finally, there is the implementation stage whereby the best options are selected and implanted (fiu.edu). This model links the project being considered and ways of assisting it. It is intended for long term planning whereby policymakers are made aware of future impacts of their decisions. Budgeting is based on mini projects rather than grater consolidated units. It explains long-term expenditure of the project and compares it with alternative approaches that may be used to arrive at the goals. Generally, they are used in capital projects and aids in explaining how these projects will be funded. Some of the limitations in the use of this model is change in long-term goals, inadequate data on costs and projects, and complexity in the management of projects.
Zero-Based Budgeting:
The budget is planned by partitioning government activities into individual decision units. Together with each unit is the cost at various level of implementation. In this model, all departments are required to preserve their programs and substantiate their existence every year. The heads of individual departments are required to demonstrate the different levels of service that they can provide under various funding levels – zero funding inclusive. They are also required to show alternatives and cost to be incurred in each level of funding. After evaluation, the departmental units are leveled according to their significance in contribution of the set goals and objectives. The main thrust of this model is to eliminate obsolete services and expenditures and concentrate resources to the most pressing areas. This is good approach to the federal government budgeting because only the departments that have been given priorities will be allocated funds.
Site-Based Budgeting:
This model puts more emphasis on decentralization of decision-making process. It creates a site based budgeting approach where local staffs are involved in the process making them accountable to the maintenance of the budget as well. The major advantage of this model is that it gives those who understand the functions of a department the power to allocate revenue. Decentralizing budgetary process fosters local accountability and promoting participation in budget development.
New Performance Budgeting: this is outcome oriented under the Government performance act of 1993. It tries to connect the sharing of resources with management performance. In this case, government agencies are supposed to prepare a five-year tactical plan and include a performance guide as well. The other is balanced budget. In this case, revenue exceeds expenditure. Deficits from a particular fiscal year are not transferable to another fiscal year. State and local government commonly use this form because they are required to formulate balanced budgets (fiu.edu). This cannot apply to the federal government because it has the mandate to spend more than its revenue.
The Supply Side Economics:
This model suggests a reduced government participation in the economy that is; economy should be less regulated and low taxation. It considers tight regulation as unhealthy because it limits corporate entrepreneurship while high taxes are said to take away money that could have been used for investment.
Future Revenue Projections
The budget deficit is projected to grow due to the increase in spending for Social Security and the health care initiatives. The federal revenues are projected to grow to about 20% of the GDP compared to the current 17%, which will be fostered, by the continuing economic revitalization and alterations of the tax law (DiNapoli, 2008, p.5). The federal expenditure is estimated to grow by 69% over the ten years with an annual growth of $2.4 trillion. The mandatory spending is projected to grow at about 79% for the next ten years while the discretionary budget is expected to grow by 17%.
Revenue Prediction and Estimation
Predicting revenue is a crucial component of the budget making process. For Governors and the legislature to make informed decisions on how to allocate funds to particular projects or whether to raise or reduce tax rates, they have to be aware of the amount of revenue they are working with. Those responsible in planning the budget must know how much revenue is anticipated in the upcoming fiscal year under the existing tax laws and when the laws are altered. Two types of revenue prediction include revenue forecasting and revenue estimation. Prediction of baseline revenue under existing tax laws is referred to as revenue forecasting. Revenue estimation is the prediction of the impacts of the changes of specific tax laws (Rubin & Mantell, 2003, p.1057).
In the federal government, both the executive and legislature are responsible in preparing revenue forecasts and revenue estimations. In the executive, the Office of Tax Analysis (OTA) sets revenue forecasts and estimation for the Office of Management and Budget – responsible in the formulation of the federal budget. In the Congress, Congressional Budget Office (CBO) is responsible in preparing the baseline revenue forecasts and estimates and evaluating the impact of certain revenue expenditure proposals. The House and the senate Budget Committees uses the CBO’s revenue forecasts and estimates to prepare both their annual budget resolutions and directives to other Congressional Committees. The Joint Committee on Taxation (JCT) determines the impacts of revenue of projected tax law alteration. The Congress cannot put into consideration any proposal to change tax law legislation without a note from the JCT (Rubin & Mantell, 2003, p.1058). The Joint Committee Staff utilizes the confidential tax returns data to set up revenue estimates.
State Governments: Amongst the states, the responsibility for revenue forecasting differs. For instance, in 17 states, the executive is responsible for preparing the state revenue forecast while in 22 states; a consensus process is used to reach at the final forecast. In this case, a consensus group comprises of the executive and legislative representatives, private sector, and university sector. Consensus tends to produce forecasts that are more precise. The revenue estimations are tabled to the legislature as fiscal statements appended normally to the tax bills. The statements are prepared either by the executive agency mandated for revenue forecasts or by the executive branch. In some of the states, legislative branch members may also be mandated to develop revenue estimates.
In most local governments, the executive branch is the one responsible for preparing revenue forecasts. Conversely, in bigger cities, legislative members are involved in preparing revenue forecasts while in some municipalities, academicians and other consultants outside the local government may be given the task.
Revenue Estimation and Forecasting Methods
There are four ways used by the various government to estimate and forecast revenue. They include qualitative methods, time-series methods, econometric modeling, and micro-simulation modeling. The Qualitative methods of predicting revenues rely on expert reports and opinions. However, few government agencies use it exclusively on these judgments to arrive at the revenue forecasts and estimates; but rather, it is used to alter the results of more official quantitative estimation and forecasting methods. A general application of this approach is consensus forecasting whereby information from various sources is used to reach a final revenue projection.
Time-Series Methods: in this approach, data on revenues in the previous fiscal year(s) are utilized to predict the impending year(s). This method has four approaches, which include simple trend analysis, autoregressive approach, mixed technique approach, and analysis of seasonal fluctuations. The first three approaches are used for future predictions of revenue estimation and forecasting while the last one is used to foresee revenue within the budgetary year. The simples’ trend assumes that the revenues in the fiscal year being forecasted will grow in the same rate as in the previous year. Others assume that the revenue will grow at the same average rate of the previous year. The complex trend uses auto-regression approach whereby the prediction is made from weighted average of previous year outcomes with a random interruption term for the current fiscal period (Rubin & Mantell, 2003, p.1058). The main pro of time-series approach is due to their limited data that is required compared to other approaches.
Economic models: these are mathematical illustration of an economic incident. Econometric technique varies from the time-series analysis in that it is founded on implicit relationships between variables rather than change in time. Econometric technique may involve a single equation, a set of equations solved recursively, or set of equations solved simultaneously. In recursive model, forecasted data for independent variables are fed into the system and no response for the dependent variables while in simultaneous model, there is response. Various concerns need to be resolved when applying econometric models, which include forecast of the fundamental economic variables, included in the approach, solving collection hitch, defining the tax base, and tuning legislative alterations during the period. Another issue is the fundamental relationship among economic activities and tax collection. The other issue arises due to lack of appropriate data in measuring tax base particularly with state and local governments. The final issue to consider relates to the alterations in tax rates.
Micro-simulation models: this approach uses data from a chance test of digitized individual taxpayer returns and a tax calculator to predict the performance of a taxpayer. The use of micro-simulation technique in estimating the impact of specific tax law alterations can be achieved in three ways: altering the tax parameters, altering the coding of tax calculator, and by altering both. Some of the issues to be addressed in this model include ensuring that the taxpayer has paid the taxes in the year being referenced (Rubin & Mantell, 2003, p.1059).. The data have to be updated with respect to taxpayer’s base and be customized to include changes in tax laws.
The four models can be used separately to estimate and forecast revenue. However, due to the limitations linked to each model, many governments combine various methods in forecasting and estimating revenue more precisely.
Selecting Revenue Forecasting and Estimation Methodology
Federal government: the OTA, CBO and JCT rely primarily on micro-simulation and econometric model for revenue forecasting and estimation. In case these models are not accurate, other techniques are used. The Congress compares the various revenue estimates and adopts one of them. The estimation of certain tax law alterations during Congressional considerations of tax laws, the JCT gives the executive revenue estimates. Although, sometimes the executive branch may opt to use Treasury estimates to make decisions whether to support a proposal or not.
State governments: States utilize various estimation and forecasting methods. Time-series analysis is commonly used in forecasting revenue for some taxes- stable taxes. Most states use more than one model to estimate and forecast revenue. Most local governments rely on qualitative models due the paucity of data.
Errors in Revenue Estimation and Forecasting
Because Estimations and forecasts are made under an uncertain climate, possibility of error occurrence is inevitable – overestimating or underestimating revenues. Overestimating predicted revenue has a more pain politically than underestimating projected revenue. State are required to balance their budgets and have to reimburse their overestimations by increasing tax rate, reducing expenditure on certain projects, or using their reserves. When overestimation of revenue takes place, policy makers have limited time to give feedback. This is because revising tax rates upwards requires time to arrive at political agreements or finding new sources (Rubin & Mantell, 2003, p.1059). Similarly, opting to reduce budget for other projects requires time for the policymakers to determine the advantages and harm that will be caused for various projects.
Underestimates on the other hand can be challenging as well, depending on the decision arrived to utilize the extra revenue. When there are surpluses at the end of the fiscal year, legislators can opt to reduce the rate of taxation, which limits the revenue growth that may be required in the future in controlling revenue cuts to some projects. The legislature can also opt to undertake extra projects, which will prove to be hard to continue financing in the future.
The area in which variable uncertainties arise is predicting how taxpayers adjust their behaviors following tax laws alterations. When tax laws are altered, normally there are shifts on the relative prices and expenditure that taxpayers face either as manufacturers or as consumers. In reaction to these changes, taxpayers opt to change their behaviors, which largely affect the tax base. This will affect the revenue estimation because the tax to be collected depends not only on the imposed rate but also on tax base variable.
Ways of Enhancing Revenue Estimation and Forecasting
Revenue estimation can be enhanced by finding ways of dealing with the complexities involved in forecasting revenue and in case the errors do occur, they do so minimally in a portion that they do not disrupt the budget process. One way is by analyzing the errors from previous revenue estimations and refining the assumption made. Another way is making regular revenue estimation and forecasting. The refined estimates are utilized to prepare the final budget. Ensuring freedom from the politicking the process. Addition of extra expertise can also reduce the error in revenue estimation.
For accurate and more realistic revenue estimates, the net effects of the tax changes must be considered. The collective impact of tax alterations and government expenditure changes the behavior of taxpayers. These behaviors are crucial as they affect the tax base when determining revenue estimates (Rubin & Mantell, 2003, p.1059). To arrive at realistic revenue estimates and forecasts, an analytical method that recognizes response to changes in tax alterations from both individuals and businesses.
Conclusion
The process of budgeting is critical in ensuring that the scarce resources are allocated well in a way that the interests of the public are put into consideration. The process is almost the same for all level in government structure with the executive branch formulating the budget that is subject for approval by the legislative branch. Budget creates accountability of the allocated funds. Choosing the best budgetary approach in preparing budget is critical. The state and local governments are required by law to balance their budget unlike the federal government that can expand its finance from various sources such as borrowing or altering the interest rate or printing more money. Taxes are a major source of revenue at all levels of governance.
The significance of meaningful revenue estimates and forecasts for an excellent budget and formulation of economic policies requires major alterations in the revenue estimation and forecasting methodologies that are currently used by both the executive and legislative branches of government. These revenue-estimating methods ignore the impact of tax changes misrepresent the results of the alterations on tax revenues. The consequence of misrepresenting information is erroneous revenue estimates. The policymakers make decisions that are not in line with the correct estimates. To have better approaches in preparing the best policies, the methods and analytical approaches in revenue estimation process need to be improved.
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