The Senate Fiscal Agency, House Fiscal Agency, and the Department of Treasury agree that the following recommendations comprise a prudent and reasonable approach to improving the tools that are currently available for estimating the fiscal impact of proposed tax law changes:
Accurate and detailed estimates of the direct impact of the tax law change are essential when analyzing the fiscal impact of proposed tax law changes. Accurate static estimates are also a critical input to a dynamic revenue estimating model because the first step in preparing a dynamic analysis of a tax law change is to estimate the direct or static impact on state tax revenue. A dynamic model can then estimate the extent and magnitude to which this direct impact will generate additional indirect or secondary impacts.
Currently, the Department of Treasury has micro-simulation models designed to analyze the individual income tax and the single business tax. We recommend that micro-simulation models be developed to analyze proposed changes to the sales tax and property taxes.
In addition, we recommend that models be developed to analyze the incidence of tax changes among individuals in various income groups and among businesses by size of business and by business sector. We believe that these additional models would provide valuable input to the entire analysis process. These models should be developed jointly by the three agencies, and each agency should have access to the use of the models. However, it is imperative that taxpayer confidentiality be maintained throughout the process. In particular, access to the single business tax model may need to be restricted due to concerns about taxpayer confidentiality.
Recommendation #2:
Once the additional micro-simulation models have been developed, staff should review the
progress of dynamic modeling in other states and determine when the time is right to develop
a
dynamic revenue estimating model for Michigan.
The Dynamic Revenue Estimating Seminar and the survey of the states demonstrated that, although it is technically feasible to produce dynamic estimates with an appropriate model, there is still very limited experience with developing and operating a dynamic revenue estimating model. No states are currently conducting dynamic analyses on a regular basis (although California will start to do so this year), and only three or four states have any experience in building and operating these types of models.
In addition, the symposium that the Joint Committee on Taxation, U.S. Congress hosted demonstrated that state-of-the-art in dynamic analysis is not yet at the place where reliable long-run estimates of the impact of dynamic feedback effects on revenue are feasible. However, experts are continuing to refine and expand the models and are likely to resolve these problems in the near future.
Therefore, we believe that it would be advantageous for Michigan to focus initially on expanding the number of micro-simulation models currently available'for use. This approach will allow Michigan to monitor the progress of other states and gain valuable insight and experience from other states' successes and failures. Information of this type will be extremely useful when we determine that the time is right to develop our own model.
In conclusion, we believe that models developed jointly by the Department of Treasury, Senate Fiscal Agency, and House Fiscal Agency in a systematic, open process would enhance our ability to accurately estimate the revenue impact of tax law changes. However, it must be understood that because dynamic revenue estimating models are not simple, easy-to-use models, they cannot provide accurate instant analyses. Because of the complexity and time required to perform dynamic analyses, the models may only be appropriate for major-tax policy changes with significant static revenue impacts.