Improving CBO's Methodology for Projecting Individual Income Tax Revenues

February 10, 2011

In preparing its annual report on the budget outlook, and updates to that report during the course of the year, the Congressional Budget Office (CBO) projects revenues from the federal individual income tax. This background paper discusses two possible ways to use information about tax collections to improve CBO's projections of tax receipts: Explicitly using the information provided by recent tax collections to adjust the projections, and basing the projections on multiple years of information from tax returns rather than relying on just the most recently available year. The results of CBO's analysis suggest that combining the two approaches--that is, using the information from recent tax collections and relying on multiple years of tax return information--can modestly improve the near-term projection of individual income tax revenues. Those findings have led CBO to use that combination of approaches in estimating revenues in recent years.