Options for Tennessee's Tax System: A Prospective Portfolio Analysis

Abstract

This paper makes use of an investment-style portfolio model to prospectively evaluate different options for Tennessee’s state tax system. Tax reform plans proposed by the Tennessee Tax Structure Study Commission are analyzed, along with the current system, to see how well they balance the competing goals of revenue growth and revenue stability. Using an optimization model, the different tax systems are evaluated by comparing them to systems using the same tax options that exhibit minimal deviations of actual revenue around expected revenue while maintaining the largest possible growth rates. These results are further analyzed on the basis of equity, efficiency, competitiveness, and simplicity to create overall policy recommendations.