Income Elasticities for State Tax Revenues: Techniques of Estimation and Their Usefulness for Forecasting

Abstract

The concept of income elasticity of tax revenues has been used in numerous studies with little concern about its theoretical foundations. Income elasticities have also been used for revenue estimation with limited concern about stability over time or about the accuracy of the forecasts. This paper explores the development of the tax elasticity measure and, using revenue data from Washington, compares year-to-year elasticity measures with those established by regression analysis. The length of the time series is varied to check on the stability of the coefficients. Finally, the elasticities are used to predict revenues for three years to check on their accuracy for revenue estimation.