Portfolio Analysis and Vertical Equity: a New York Application

Abstract

This study makes two contributions to the literature on portfolio models and the analysis of state finances. First, the study applies recent developments in time series analysis—unit root tests for stationarity—to develop more efficient estimates of tax growth and tax instability than heretofore. Second, the study extends the conventional tax portfolio model, which balances the portfolio mix to maximize stability for selected growth targets, to encompass a third tax policy goal: vertical equity. The model is applied to New York State to demonstrate its practical usefulness as a fiscal tool for state policy analysts.