Kentucky property insurance surtax revenue: a comparison of alternative forecasting models

Given the absence of a formal forecasting model of property insurance surtax revenue for the state of Kentucky, this paper presents the insample and out-of-sample forecasts of four models: Holt linear trend algorithm, autoregressive model, linear trend/autoregressive model, and economic activity model based on annual fiscal year data from 1984 to 2001. The Holt linear trend algorithm and the linear trend/autoregressive model were reasonably close in their respective forecasting performance for both the in-sample and out-ofsample forecast horizons. However, the linear trend/autoregressive model exhibited some evidence of instability for the period 1992 to 1994. With respect to the out-of-sample forecasts, the Holt linear trend algorithm provided a better fit to the actual surtax data. Moreover, as time passes and additional data on the surtax becomes available, the models presented can easily be updated and reevaluated.