Sales tax forecasting isn’t just a spreadsheet exercise, it’s a strategic necessity. Our latest research began with a simple question: can consumer sentiment metrics (and other leading indicators) help us see Texas retail tax trends before they hit our budgets? The short answer it, yes... but with some caveats.

While we did find correlations between consumer confidence indices and statewide retail sales tax collections in certain forecasting models, when we incorporated them into more robust time-series models, that predictive power dissipated. This is a bit unintuitive, since consumer confidence surveys are intended to be an indication of future household consumption and savings patterns. But it does highlight the limitations of using nationwide economic indicators to predict retail sales tax in a fast growing state.

But we did find one measure that stood out: the Dallas Fed’s Texas Leading Index (TLI). In our time series models, TLI at a three-quarter lag emerged as a statistically significant predictor of statewide retail sales tax performance, even after controlling for autocorrelation in the tax data.

This means city finance teams now have a data-backed early signal to plug into their revenue forecasting process, one that consistently moves ahead of the actual shifts in consumer activity. But this isn’t plug-and-play. To extract local value, cities need to calibrate the TLI to their own historical data and blend it with a small number of real-time local indicators. The good news? You don’t need to rebuild your models from scratch. With a few thoughtful integrations, this approach can turn statewide sentiment into a city-specific, forward-looking revenue tool—and give your budget team the lead time it deserves.

TL;DR for City Managers

• Early Warning Signal: The Texas Leading Index (TLI) reliably flags statewide retail sales tax trends 6–9 months ahead, giving you a head start on revenue shifts.

• Local Calibration: The TLI is a statewide indicator, and although it can be used to improve statewide sales tax forecasts, your mileage may vary when applying it locally. Your city will need to calibrate the impact based on your unique retail composition and growth patterns.

• Routine Budget Triggers: Building a TLI threshold into your monthly monitoring can give you an early warning for possible budget tightening.

• TLI Has Been Declining: Since peaking in March 22, TLI has been on a steady decline. As of April 2025, the 12-month average is down about 1.8% from April 2024.

• Other Indicators Showed Mixed Results: We also evaluated other measures, including a variety of consumer sentiment surveys. We found that the predictive power of these measures did not hold up under more robust forecasting models.

• Use with Caution: As with any leading indicator, past performance of the TLI doesn't necessarily equate to future results.

TL;DR for Budget and Finance Managers

• Integrate TLI into Forecast Models: Add the Texas Leading Index at a three-quarter lag as an exogenous (outside) variable alongside your city’s tax history to capture statewide economic turns.

• Calibrate Sensitivity Coefficients: You'll need to calibrate the role statewide economic shifts correlate to your local economy. Cities in a growth cycle may not be as sensitive to statewide circumstances.

• Augment with Local Signals: Blend your TLI‐augmented forecast with 1–2 quick local indicators (e.g., quarterly foot-traffic, permit volumes, key retailer sales) using weighted averages or ensemble methods to improve fit during idiosyncratic local events.

• Retail Correlations Only: This research only evaluated the value of TLI and other indicators in predicting statewide retail sales tax. There are many other elements of sales tax that operate independently relative to retail sales.

Read the full report

If you'd like to read the full deep-dive, you can find it here: Consumer Sentiment, Leading Indicators, and Retail Sales Taxes in Texas.