Consistent underestimation bias, the asymmetrical loss function, and homogeneous sources of bias in state revenue forecasts

One component of revenue forecast error has been attributed to the phenomenon of consistent underestimation bias due to asymmetrical loss. Because underestimation of revenue results in less loss to forecasters than overestimations, there appears to be a bias for forecasters to underestimate revenue forecasts. This paper confirms this hypothesis. Additionally, with the greater use of national forecasting organizations that provide eceonomic forecasts on which revenue forecasts are based, a secondary source of forecaster bias may be present in many state level forecasts. This hypothesis is supported by the increase in number of states using such organizations and a decrease in the standard deviation of the annual mean percentage forecast error.