Projects Funded for Deirdre Sutula


Valuation of Government Income

Peter Berck and Deirdre Sutula


Specific Objectives of the Project:

Our objective is to develop a method of valuation of state-owned resources and state-owned income streams. Examples are tax receipts and forestry sales. This project will help clarify the importance of California’s natural resources that provide income to the state, and will inform how these resources should be used. Our results will also advise policymakers as to whether California should invest in or divest from these industries.

Summary of Results:

We found that none of the standard portfolios correlate well with either tax returns or returns to forestry. These standard portfolios include the 23 Fama-French portfolios, the DOW Jones Industrial Average, the S&P 500, and the NASDAQ index. Tax returns do correlate slightly with state GDP. Forestry and tax returns are particularly difficult income streams to match to standard portfolios because data is typically only available at the annual level, or in the case of sales tax revenue at the monthly level. We also try to value these streams using a discount rate derived from single index models such as the capital asset pricing model. However, the lack of correlation between standard portfolios and the tax or forestry returns leads to the use of the sure rate of interest with no adjustment for risk.
Finding a monetary valuation for the difference between stable and unstable tax revenue streams, such as California’s versus that of Texas, could be very valuable for demonstrating to policymakers the importance of revenue type and tax structure for state budget stability. Further research is needed to find a valuation method for these income streams.