An Evaluation of CBO’s Past Revenue Projections

In the course of producing baseline projections of the federal budget, the Congressional Budget Office regularly projects what federal revenues would be in the current year and in the next 10 years if current laws generally remained unchanged. To refine its methods and improve its projections, the agency routinely assesses the accuracy of its past projections.

In this report, CBO assesses the quality of the revenue projections that it has produced since 1982—the earliest year for which the information necessary to assess the projections is available—by comparing them (after an adjustment to account for the effects of subsequent legislation) with actual revenue collections. Specifically, it looks at the projections of total revenues and of different sources of revenues for the budget year (the next fiscal year after the year in which the projections are made) and for the sixth year of the projection period (including the current year).

The agency has tended to overestimate revenues in its projections—especially those that extend further into the future—largely because it is difficult to predict the timing, depth, and duration of downturns in the business cycle. A disproportionate share of the largest projection errors (which are calculated as the difference between the adjusted projection and actual revenues, expressed as a percentage of actual revenues) are in projections made just before a recession. When the four budget-year projections that were produced at or near business cycle peaks are excluded, the accuracy of the projections, according to key statistical measures, improves significantly.

How Do CBO’s Revenue Projections Compare With Actual Outcomes?

In evaluating its projections, CBO focused on three characteristics of forecast quality—centeredness, accuracy, and dispersion (see table below).

Centeredness. The tendency of a set of projections to not repeatedly err in the same direction is referred to as centeredness. To measure centeredness, CBO uses the average error—the arithmetic mean of the projection errors. A perfectly centered set of projections would have an average error of zero.

The average error for CBO’s budget-year projections published since 1982 is 1.2 percent, indicating that, on average, CBO has slightly overestimated total revenues for the budget year. For context, an error of that size in the baseline projections that CBO produced in 2018 would amount to about $42 billion of the roughly $3.5 trillion in total revenues that CBO projected for 2019.

Overestimates and underestimates offset each other in the calculation of the average error, so the measure can obscure the magnitude of the errors. The 1.2 percent average error for CBO’s budget-year projections reflects projections in which CBO overestimated revenues by as much as 25 percent (the projection for 2009 published in January 2008) and others, namely those for the late 1990s and the mid-2000s, in which the agency underestimated revenues by nearly 10 percent.

Projection errors are generally larger the further into the future the projection extends. In its projections of revenues for the sixth year of the baseline projection period, CBO has, on average, overestimated revenues by 5.6 percent.

Accuracy. This characteristic refers to how close the projected values are to the actual amounts. CBO uses two standard measures of accuracy: the average absolute error (that is, the average of all errors with the negative signs removed from the underestimates) and the root mean square error (RMSE).

The average absolute error for CBO’s budget-year revenue projections made since 1982 is 4.9 percent, and the RMSE is 7.0 percent. An error the size of that average absolute error in the revenue projection for 2019 that CBO released in April 2018 would correspond to an overestimate or underestimate of $171 billion.

The sixth-year projections have larger errors—an average absolute error of 9.9 percent and an RMSE of 11.6 percent. An error the size of that average absolute error in the revenue projection for 2023 that CBO released in April 2018 would mean that actual revenues were $419 billion higher or lower than the agency projected.

The average absolute error and the RMSE appear to level off by the sixth-year horizon; those two measures of CBO’s sixth-year projections are roughly equal to those of the agency’s fifth-year projections. The small sample size of projections extending beyond six years does not allow for a comprehensive assessment, so the apparent stabilizing of the measures cannot yet be confirmed.

Dispersion. The size of the range around the projection errors is referred to as the errors’ dispersion. In this analysis, CBO uses the range formed by the middle two-thirds of errors—known as the two-thirds spread—as its measure of dispersion. A larger two-thirds spread of errors implies that any single projection for that particular time horizon may be less certain.

The dispersion of CBO’s revenue projection errors increases with the projection horizon. For the agency’s budget-year projections, the two-thirds spread of errors is 11.9 percent; for the sixth-year projections, it is 19.8 percent.

How Do CBO’s Projections Compare With the Administration’s Projections?

The errors in the Administration’s budget-year projections of revenues have been similar, in both size and direction, to those in CBO’s projections. In the budget-year projections that it has published since 1982 (adjusted to exclude the effects of its proposed policy changes), the Administration overestimated revenues, on average, by 1.7 percent—slightly more than the 1.2 percent that CBO overestimated by, on average (see Table 1). The RMSE for the Administration’s budget-year projections is 7.4 percent, close to the 7.0 percent RMSE of CBO’s budget-year projections. The accuracy of the Administration’s projections of specific revenue sources was similar to that of CBO’s projections.

The Administration’s sixth-year projections are less centered than CBO’s projections. Whereas CBO overestimated revenues in the sixth year of the projection period by 5.6 percent, on average, the Administration overestimated revenues in the sixth year by 7.4 percent, on average. Likewise, the Administration’s sixth-year projections are slightly less accurate than CBO’s: The RMSE of the Administration’s sixth-year projections is 13.2 percent, and that of CBO’s projections is 11.6 percent. The Administration’s sixth-year projection errors were, however, less dispersed than CBO’s were.

What Factors Have Contributed to Differences Between CBO’s Projections of Revenues and Actual Revenue Collections?

Many of CBO’s revenue projection errors can be attributed to errors in the agency’s economic forecast; other errors in the revenue projections arise from differences in projected and actual income relative to the size of the economy. The largest forecast errors are associated with revenue projections produced for years near downturns in the business cycle, when gross domestic product (GDP) was significantly lower than expected. Errors have also arisen from other factors, including unexpected declines in certain types of income relative to GDP—most notably wages and salaries, corporate profits, and capital gains realizations—and changes in the share of overall income earned by the highest-earning taxpayers (who face the highest tax rates).

Projections of specific revenue sources have contributed in varying degrees to errors in the projections of total revenues. Projections of individual income taxes have contributed the most to errors in CBO’s projections of total revenues because they were the largest source of revenues in every year of the period analyzed. The next two largest sources of error were the projections of corporate income taxes and payroll taxes. The projections of smaller revenue sources—excise taxes, customs duties, and estate and gift taxes—have contributed much less to the errors in the agency’s projections of total revenues.