Governor: After several years of large gains, our states housing mark

Question

Governor: After several years of large gains, our state’s housing market is posting smaller gains this year. Other areas of our economy grew slightly this year, but no more than in recent years. Thus, given these sources of tax revenue, this year’s overall tax revenue is likely to be higher than last year’s. Nevertheless, I am pessimistic about our ability to meet the financial obligations detailed in this year’s budget.

Which of the following, if true, most helps to explain the governor’s pessimism?

A. Several items in the state’s budget for this year are required by law to be funded from sources other than tax revenue collected by the state.

B. The financial obligations in this year’s budget are greater than the obligations in any previous year’s budget.

C. Tax revenues associated with housing, such as property sales taxes and construction industry income taxes, will be higher this year than they were last year.

D. Fewer new housing-related jobs were created in the state this year than last year.

E. This year’s state budget is based on the assumption that tax revenue will grow at no less than the same rate as it has in recent years.

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Official Answer

E

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MartyMurray · Accepted Answer

Governor: After several years of large gains, our state’s housing market is posting smaller gains this year. Other areas of our economy grew slightly this year, but no more than in recent years. Thus, given these sources of tax revenue, this year’s overall tax revenue is likely to be higher than last year’s. Nevertheless, I am pessimistic about our ability to meet the financial obligations detailed in this year’s budget.

Which of the following, if true, most helps to explain the governor’s pessimism?

The governor says the following:

given these sources of tax revenue, this year’s overall tax revenue is likely to be higher than last year’s

Then, the governor says the following:

I am pessimistic about our ability to meet the financial obligations detailed in this year’s budget.

The governor's pessimism is a little surprising since, if tax revenue is likely to be higher this year than it was last year, then one might think that the governor would be confident that the state can meet its financial obligations, but the governor isn't confident. Rather, the governor appears to believe that its unlikely that the state will be able to meet them.

Which of the following, if true, most helps to explain the governor’s pessimism?

This question is a Resolve the Paradox or Best Explains question, and the correct answer will explain or help to explain why the governor is pessimistic about the state's ability to meet its financial obligations.

A. Several items in the state’s budget for this year are required by law to be funded from sources other than tax revenue collected by the state.

We have to be careful not to make up an unsupported story about why this choice explains the governor's pessimism. After all, we could decide that this choice explains why the governor is pessimistic because we could get the impression that this choice indicates that the state's inability to meet its obligations will result from issues related to funding from sources other than tax revenue.

However, that story isn't supported. After all, this choice doesn't say that there are issues related to the sources other than tax revenue. So, we have no reason to believe there are.

So, this choice doesn't explain the governor's pessimism.

Eliminate.

B. The financial obligations in this year’s budget are greater than the obligations in any previous year’s budget.

This choice doesn't explain the governor's pessimism. After all, while, as this choice says, the financial obligations in this year’s budget are greater than the obligations in any previous year’s budget, it's also true that tax revenue "is likely to be higher this year than it was last year." So, it may also be that tax revenue will be greater than in any previous year.

So, this choice doesn't explain why the governor is pessimistic.

Eliminate.

C. Tax revenues associated with housing, such as property sales taxes and construction industry income taxes, will be higher this year than they were last year.

There are two reasons to eliminate this choice.

The first is that it basically restates something we already know, which is that tax revenue is expected to increase this year.

The second is that the fact that the revenues mentioned by this choice will be higher this year than they were last year clearly is not a reason to be pessimistic about the ablity of the state to meet its financial obligations.

Eliminate.

D. Fewer new housing-related jobs were created in the state this year than last year.

Notice that this choice says that  fewer  housing-related jobs were created in the state this year.

Of course, what that means is that at least some new housing-related jobs were created.

The fact that new jobs were created is not on its own a reason to be pessimistic about the state's ability to meet its financial obligations.

Eliminate.

E. This year’s state budget is based on the assumption that tax revenue will grow at no less than the same rate as it has in recent years.

This choice explains the governor's pessimism.

After all, the passage states that "our state’s housing market is posting smaller gains this year" and that "Other areas of our economy grew slightly this year, but no more than in recent years." It then goes on to describe the housing market and other areas of the economy as "sources of tax revenue."

So, we see that one source of tax revenue, "our state's housing market" is growing less than in previous years and that other sources grew "no more than in previous years." So, overall, the sources of tax revenue will likely grow less than in previous years meaning that tax revenue itself will likely grow at "less than the same rate it has in previous years."

Thus, tax revenue will likely grow less than the budget assumed it would, and therefore, the state is unlikely to meet its financial obligations.

Keep.

Correct answer:  E

8Harshitsharma · Answer

There are treacherous answer choices in this one.

The problem with choice B is that it is uncertain and doesn't clearly explain the governor's pessimism. Why? That's because we don't know how high the financial obligations were in this year's budget. If they were higher than the projected overall tax revenue then the governor's pessimism is justified. However, if the financial obligations were higher than any other year but lower than the projected tax revenue for this year then the governor won't have any reason to be pessimistic. So, this choice is not air tight.

Choice E on the other hand states that the this year's tax budget is based on the assumption that overall tax revenue will grow at the same or even greater rate this year than the previous year and since we already know that the city's housing market will have smaller gains this year. The governor and we can be certain that the obligations won't be met.

GmatKnightTutor · Answer

Fun little question. I get it. I know answer choice (B) can be tempting. Let's get into this. No question like this on the gmatknight blog currently but it's an interesting one that a mathematical POV may be helpful with.

Governor: After several years of large gains, our state’s housing market is posting smaller gains this year. Other areas of our economy grew slightly this year, but no more than in recent years. Thus, given these sources of tax revenue, this year’s overall tax revenue is likely to be higher than last year’s. Nevertheless, I am pessimistic about our ability to meet the financial obligations detailed in this year’s budget.

Which of the following, if true, most helps to explain the governor’s pessimism?

Which of the following, if true, most helps to explain the governor’s pessimism?

Basically, we're looking for why the governor doesn't think financial obligations are going to be met this year.

A. Several items in the state’s budget for this year are required by law to be funded from sources other than tax revenue collected by the state. 
Nope. We're not really given an indication how these OTHER SOURCES are doing. Only the state's housing market is kind of brought up in a negative way. In addition, the governor's position seems mainly based on TAX REVENUE - not non-tax revenue.

B. The financial obligations in this year’s budget are greater than the obligations in any previous year’s budget. 
Interesting. It's not terrible to be fair. But imagine obligations went up by only 0.2% and technically hit an all time high... That doesn't necessarily mean tax revenue couldn't meet that obligation with only a small 1% total increase. Sure, tax revenue from housing may be down, but the other sectors could have "pulled" the total revenue up by an adequate amount. The passage does say that OTHER AREAS of the ECONOMY did grow. And the governor does mention that this year's total tax revenue IS LIKELY TO BE HIGHER than last year's.

C. Tax revenues associated with housing, such as property sales taxes and construction industry income taxes, will be higher this year than they were last year. 
Nope. This is kind of going in the wrong direction. We're looking for something that means we won't meet financial obligations.

D. Fewer new housing-related jobs were created in the state this year than last year. 
Nope. I understand this is something negative but it's not really based on the governor's position which is centered around tax revenue. Even if this is something that explains or is a byproduct of a SLOWING HOUSING sector, it doesn't explain why the governor thinks that EVEN THOUGH total tax revenue will probably go up, we're still not going to meet our financial obligations.

E. This year’s state budget is based on the assumption that tax revenue will grow at no less than the same rate as it has in recent years. 
This is the answer. Basically, if, for example, you think that because tax revenue is going up by 5% or more every year for the past 10 years, that's it's okay to commit to increasing your expenditure (financial obligations) for next year by 5% as well, you could mess up. What if tax revenues do increase next year... but only by 2%!

JoeKan1234 · Answer

B cannot explain the pessimism. After all, this year's revenue is likely to be higher even if the state faces greater financial obligations. GMAT-Club-Forum-eheo1co2.png

bronaugust · Answer

To solve this question, let us deploy  IMS's four-step technique .

STEP #1   ->  IDENTIFY THE QUESTION TYPE

Let us read the question stem to identify the question type.   
 
The stem indicates a  resolve/explain the paradox  question.

STEP #2   ->  X-RAY THE PASSAGE

In a  resolve the paradox  question, it is a must to x-ray the passage and figure out the paradox. Let us therefore go through the passage.
 
 FACT#1  -> State’s  housing market  is posting smaller gains this year after several years of large gains.
 INFERENCE:  The housing market is posting gains this year, but these gains are not as substantial as those witnessed the past several years.

FACT #2  ->  Other areas  of our economy grew slightly this year, but no more than in recent years.
 INFERENCE:  Areas other than housing market grew slightly, but the growth was not more than (was less than or equal to) the growth observed in recent years.

PARADOX:  While this year’s overall tax revenue is likely to be higher than last year’s, the governor is pessimistic about the state's ability to meet the financial obligations detailed in the year’s budget.

STEP #3   ->  FRAME A SHADOW ANSWER

To frame a shadow answer, we need to know what the correct answer must do. In this question, the correct answer must explain why the governor is pessimistic about the state's ability to meet the financial obligations detailed in the year’s budget despite the fact that this year’s overall tax revenue is likely to be higher than last year’s.

SHADOW ANSWER:  Any situation that helps explain the pessimism of the governor, giving us a reason to believe that there will actually be difficulty in meeting the financial obligations detailed in this year’s budget.

STEP #4   ->  ELIMINATE INCORRECT ANSWERS

Options that do not match the shadow answer can be eliminated.

A. Several items in the state’s budget for this year are required by law to be funded from sources other than tax revenue collected by the state. -  NOT A MATCH  -  What is required by law is irrelevant and does not explain the governor's pessimism. For one, we do not know if the prescribed law will be abided by. And second, we do not have a reason to believe that there will be difficulty in garnering funds from sources other than tax revenue. Also, this option specifically mentions 'several items in the state's budget'. We do not know what these items are. Perhaps, the law could well work in the government's favor.  -  ELIMINATE

B. The financial obligations in this year’s budget are greater than the obligations in any previous year’s budget. -  NOT A MATCH  -  The comparison between this year's financial obligations with previous years looks appealing at first, but at closer introspection, it does not help explain the paradox. What we are looking for is a reason to believe that there will actually be DIFFICULTY in meeting the financial obligations detailed in THIS YEAR'S budget. Just because the financial obligations are greater this year than any year before does not mean there will be difficulty; remember, we do not have any reason to believe that the obligations are directly proportional to the growth of the economy.  -  ELIMINATE

C. Tax revenues associated with housing, such as property sales taxes and construction industry income taxes, will be higher this year than they were last year. -  NOT A MATCH  -  If tax revenues associated with housing, such as property sales taxes and construction industry income taxes, will be higher this year than they were last year, the governor should be optimistic, should he not be? More important, this option complements fact #1 and does not give us what we are looking for in the right answer: a reason to believe that there will actually be difficulty in meeting the financial obligations detailed in this year’s budget.  -  ELIMINATE

D. Fewer new housing-related jobs were created in the state this year than last year. -  NOT A MATCH  -  The passage does not concern itself with job creations, and even if fewer new housing-related jobs were created in the state this year than last year, we have no reason to believe that there will actually be difficulty in meeting the financial obligations detailed in this year’s budget.  -  ELIMINATE

E. This year’s state budget is based on the assumption that tax revenue will grow at no less than the same rate as it has in recent years. -  MATCHES THE SHADOW ANSWER  -  We know that this year’s overall tax revenue is likely to be higher than last year’s, but this option interestingly makes a comparison with recent years (very clever indeed!). We also inferred that the housing market is posting gains this year, but these gains are not as substantial as those witnessed the past several years. Moreover, areas other than the housing market grew slightly, but the growth was not more than (was less than or equal to) the growth observed in recent years. And these "areas" (housing market + other areas) are sources of tax revenue as indicated in the last sentence of the passage. What is deductible from both the drawn inferences is that the tax revenue's growth this year would be less than the growth observed in recent years (keep in mind that this year's overall tax revenue is not yet figured). Therefore, if this year’s state budget is based on the assumption that tax revenue will grow at no less than the same rate as it has in recent years, but if the growth would be less, we have a strong reason to believe that there will actually be difficulty in meeting the financial obligations detailed in this year’s budget. The paradox is resolved.  -  MARK AND MOVE

Hence, (E) becomes the correct answer.

A_Nishith · Answer

Scenario Recap:

->The governor expects overall tax revenue to be higher than last year.
->Despite this, the governor is pessimistic about meeting the financial obligations in this year’s budget.

Objective: Identify the reason behind the governor's pessimism.

Analyzing Each Option:
A. Several items in the state’s budget for this year are required by law to be funded from sources other than tax revenue collected by the state.

This doesn't explain the governor's pessimism regarding tax revenue; it focuses on funding sources other than tax revenue.

B. The financial obligations in this year’s budget are greater than the obligations in any previous year’s budget.

This option might suggest a reason for concern but doesn’t explain why the governor is pessimistic despite expecting higher tax revenue. The critical link between tax revenue expectations and budget obligations isn't directly addressed here.

C. Tax revenues associated with housing, such as property sales taxes and construction industry income taxes, will be higher this year than they were last year.

This suggests that housing-related tax revenue will increase, which should alleviate concerns, not explain the governor's pessimism.

D. Fewer new housing-related jobs were created in the state this year than last year.

This might hint at slower growth in one sector of the economy but doesn’t directly address the governor's overall concerns about meeting financial obligations.

E. This year’s state budget is based on the assumption that tax revenue will grow at no less than the same rate as it has in recent years.

This is key. If the budget is based on the assumption that tax revenue will grow at a specific rate, and the actual growth falls short of this assumption (which the governor might be anticipating), then the budget could be underfunded. This shortfall would explain the governor's pessimism. Even if tax revenue increases, it might not meet the expected rate of growth necessary to cover all financial obligations.

Conclusion: 
Option E correctly identifies the governor's concern:  the budget is predicated on a certain rate of tax revenue growth, and if that assumption is incorrect (which the governor fears), the state might not meet its financial obligations. The governor's pessimism stems from the possibility that tax revenue might not grow as much as anticipated, even if it increases compared to the previous year.
 
Correct Answer: E.

Shashank59 · Answer

I agree with the explanation provided. However, I do not follow the relation between the first two statements " Governor: After several years of large gains, our state's housing market is posting smaller gains this year. Other areas of our
economy grew slightly this year, but no more than in recent years. Thus, given these sources of tax revenue, this year's overall tax revenue is likely to be higher than last year's. "

The housing market's gains this year are smaller than those of the past several years, and the other sectors have not seen any change compared to the past years. So, based on this, we can infer that tax revenue will be lower this year since the housing market posted fewer gains than last year. But on the contrary, the governor states that tax revenue will be higher this year than last year. What am I missing?

I was stuck at this point and couldn't infer the governor's overall conclusion to solve the question. Any help to correct my understanding is highly appreciated

Nikunjgarg1 · Answer

But then how can we be sure that the estimated taxes are same or greater . We didnt know this about how high the financial obligations are .. but in the same way we also do not know how high is the overall tax budget

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anshikag22 · Answer

I have the same doubt. Any expert opinion on this would be helpful
 GMATNinja   MartyMurray

GMATNinja · Answer

This portion of the post isn't accurate: "the other sectors have not seen any change compared to the past years".

Those other areas of the economy did in fact  grow slightly . The level of growth was no more than in recent years, but there was still growth.

For example, perhaps in recent years, annual growth in those other areas ranged from 1-4%. In that case, this year's growth would be in that same range. But even a 1% growth rate between last year and this year means that those sources of tax revenue are LARGER this year than they were last year (even if only by a tiny percentage).

As for housing, there was growth there as well -- just a smaller percentage than in the several years before last week. For example, maybe housing growth was 12% per year for several years but only 5% this year.

Again, even a tiny growth percentage is still growth, so there's still an increase from one year to the next. And that means that there's an increase in tax revenue -- as long as there was positive growth across the board, there will be SOME positive increase in tax revenue.

I hope that helps!

Dream009 · Answer

You are right we are not sure - but if this was true then we can definitely make more sense of this. Eg of what the premise says

There are multiple sectors from which you get revenue - all areas are performing like last year 1 area housing has seen a bit decrease. Now we think with our tax revenue our budget may get effected why?
since if say year on year we were growing at 5% - we did do the same this year but say housing grew only by 3%
so overall our expenses did increase (undermines B) but not at the rate which were anticipated and that's where E with the extra info can help us understand this.

liberoasperiores · Answer

We have to first know what budget considerations are. Other options can be eliminated.

Governor: After several years of large gains, our states housing mark

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Governor: After several years of large gains, our states housing mark

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