Dynamic Revenue Analysis: Experience of the States

Revenue analysis, as traditionally employed by most states, estimates the direct or “static” effect of a tax policy change and may also include an estimate of behavioral responses to a tax change. Dynamic revenue analysis considers the behavioral implications in the market directly affected by the tax change but goes further, taking into account the subtle interactions and feedback effects on behavior within the entire economy. The dynamic analysis typically used at the state level considers how a tax change will affect the economic behavior of individuals and firms throughout the economy and then attempts to predict the effect of the change on economic variables and subsequently on governmental tax revenues. This report examines the empirical evidence on the relationship between state level tax changes and the economy, the theoretical economic interactions behind dynamic revenue analysis, the different types of dynamic models that have been developed, and then states’ experiences with these models