Texas To Use Dynamic Scoring
February 15, 1999
This year, Texas will begin using dynamic revenue estimating to assess state tax legislation. Dynamic scoring uses economic models to project how tax law changes might spur investment and hiring by businesses -- leading to increases in taxable activities that might offset, to some extent, the cost of tax breaks.
- The traditional method ignores the economic benefits of cutting taxes, and therefore overstates the cost of tax breaks to the state.
- Only California, Massachusetts and Minnesota widely use dynamic modeling in setting state fiscal policy.
- Attempts by Congress to introduce dynamic scoring at the federal level have so far failed.
Dynamic modeling can substantially lower the cost estimates of tax cuts. For example,
- Using static analysis, a Texas state tax credit for large- scale capital investments would cost the state nearly $1.4 billion in lost revenue over two years.
- A dynamic analysis projects the credit would only cost 62 percent of that amount, largely because the credit would cause the creation of 75,000 additional jobs and other revenue-enhancing activities.
However, dynamic models can draw different conclusions, depending on the assumptions used. For example, using static estimates, a proposed state tax credit for research and development (R&D) would cost the state $250 million in lost tax revenues.
- But a dynamic analysis by Standard & Poor's DRI estimates the R&D credit would create 9,450 jobs in Texas by 2005.
- On the other hand, a new Beacon Hill Institue study commissioned by the Texas Public Policy Foundation also used a dynamic model; it found the R&D credit might create as few as 136 jobs.
- The same study found other proposed tax cuts would add 50,830 new jobs in Texas and boost capital spending by almost $6 billion.
Sources: David G. Tuerck, et al., "The Texas State Tax Analysis Modeling Program (Texas-STAMP): Metodology and Applications," Beacon Hill Institute, Suffolk University, 8 Ashburton Place, Boston, Mass. 02108, (617) 573-8750; Robert Elder Jr., "State Alters Analysis of Tax Cuts," Texas Journal, Wall Street Journal, February 10, 1999.
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