Policy Documents

Policymakers Weighing Tax Changes Would Benefit From Dynamic Analysis

(October 12, 2009) State revenues from a 2008 severance tax hike are short of the official estimate due to deflation in the natural gas market. But a 30 percent cut in the state capital gains tax in 19991 led to revenues greater than the estimate due to increased economic activity.

Both episodes—a decade apart—underscore that policymakers weighing tax proposals would benefit from dynamic analysis, an attempt to measure the full effect of fiscal policy on revenue estimates.

A formula2 in a recent Bureau of Legislative Research dynamic analysis3 produces the following range of FY 2010 revenue estimates for the 2008 severance tax hike. The range provides policymakers with more information than the official $8 per cubic foot state estimate.

Market Price Estimate  
$10.00 $92.0 million
$9.00 $82.8 million
$8.00 $73.6 million Official state estimate
$6.50 $59.8 million
$6.21 $57.1 million 2008 Univ. of Arkansas study
$5.50 $50.6 million
$4.77 $43.8 million Price (October 9)

Conclusion

Economists do not possess the proverbial crystal ball that allows them to consistently forecast revenues in a complex economy marked by changing economic variables. But they can create a range of revenue estimates—using dynamic analysis—for policymakers weighing a severance tax increase, capital gains tax cut or other tax proposal.

-- Greg Kaza


1 PA 1005 of 1999. Sponsor: State Sen. Jim Hill, D-Nashville.

2 Market price divided by $8.00 multiplied by FY 2010 revenue estimate ($73.6 million)

3 "Dynamic Analysis Of State Severance Tax Hike," Policy Foundation memo (September 2009)