Some Sources of Confusion
Indeterminate Fiscal Impacts Listed in TRD Reports
Asterisks and associated commentary indicating that fiscal impacts cannot be determined with reasonable accuracy appear on reports for a number of reasons. These include:
- Cases where likely responses from entities are unpredictable – the most common of which is a local-enactment option,8
- Cases in which data required to evaluate a proposal are simply not available to analysts
- On rare occasion, technical errors in legislation that make its intent so unclear that no estimates are feasible
- Instances where effects are triggered by changes in an essentially unpredictable variable, as is illustrated in Exhibit 3.
The review shown in Exhibit 3 provides an example of why impacts of proposals are sometimes listed as indeterminate. The proposal would distribute extraordinary increases in oil and gas emergency school taxes from the General Fund to a to pay heating costs of low-income individuals. The distribution created by the proposal depends on two variables that cannot be forecast with a high degree of accuracy – namely, the consumer price index and oil and gas emergency school tax revenues. Use of “indeterminate” as a fiscal impact therefore seems entirely appropriate, and to do otherwise would probably be less than honest. Note, however, that in the text below the asterisks, an indication is provided of what would have occurred under the proposed measure if the forecast for emergency school taxes in FY 2002 had occurred.
The dilemma posed by a statement that impacts are indeterminate is that the essential function of an FIR – namely estimating revenues for budget purposes – is not performed. Potential solutions to the problem include displaying range estimates or placing estimates in the usual places with strong warnings that they are uncertain, based often on subjective judgments, and should be viewed accordingly. In any case, a measure whose effects are likely to be extensive but highly uncertain should be regarded with extreme caution, and indeterminate does not mean zero impact.
Similarities Between LFC and TRD Reports
TRD and Legislative Finance Committee (LFC) FIRs typically display the same impact numbers and often contain some identical commentary. As a result, sources of the analysis are sometimes unclear to readers, as is the appropriate agency to contact when questions arise regarding a particular FIR. TRD analysts virtually never take information from LFC fiscal impact reports. LFC analysts, in contrast, routinely “cut and paste” information from TRD reports into LFC reports – presumably when they agree with information contained in TRD reports. Hence when the two types of reports contain essentially identical language and numbers, the reader should assume that LFC analysts agree with material generated by the Taxation and Revenue Department.
LFC analysts often have no direct access to tax data and therefore have no precise methods of evaluating TRD reports. When LFC analysts discover what they believe to be an error in TRD reasoning, however, they typically contact TRD. If TRD analysts agree with the criticism, the estimate is promptly revised. In any case, when readers are in doubt regarding the origin of the analysis, they should compare TRD and LFC reports. If the two reports are essentially identical, assume the material came from TRD. When the reports differ, it might be wise to discuss the issue with LFC analysts to understand why they do not agree with TRD. Finally, if the basis of a TRD report is unclear, please contact the Tax Policy Director or Tax Research Office for clarification and revision if appropriate.
FIRs are revised for a number of reasons, sometimes more than once. The most common reason for revising an FIR is that an error is discovered in the original report. FIRs are often revised, however, because additional information has been discovered about an issue, say from the measure’s sponsor or a lobbyist interested in the outcome. In some cases, analysts realize a particular measure is receiving considerable attention by the legislature and initiate a revision simply for purposes of improving on the original report, even though the initial report was substantially correct. An example of this is shown in Exhibits 4 and 5 showing FIRs of a proposal to expand the veteran’s exemption against property taxes. When the original FIR was written, data on the number of New Mexico veterans was not available to the analyst. The initial report was issued because the proposal was scheduled for committee hearing before the information was available. Once additional information became available, it was placed in a revised FIR along with an extensive description of how the proposal’s impacts were calculated.
Variations in Time Required To Complete Reports
Some reports require less than fifteen minutes to complete. Others require several days. Developing thorough answers to some of the questions raised by FIRs would require many months of research, which is a major reason why TRD economists often write research papers when the legislature is not in session. The papers typically pertain to issues likely to arise in an upcoming session.
TRD economists typically make fairly complex decisions regarding allocation of time and effort on FIRs during a session. They watch committee schedules relatively closely and attempt to provide the reports in time for committee meetings. In many cases, however, committee schedules are changed. Analysts thus often employ procedures similar to those used by students in completing essay examinations. The easy questions get answered first because they require little time, followed by the more difficult ones. Analysts often view assignments and make notes of data needs; when a particular FIR requires extensive external data to address, the first order of business is to place phone calls and make similar communications for the purpose of acquiring the data. Contrary to wishes of FIR recipients, analysts often do not release FIRs until absolutely necessary. Accuracy and clarity of reports improve with time spent on them, and useful comments from other parts of the agency often appear long after they are requested.
Mr. O’Neill also points out that LFC and TRD deadlines often differ. TRD has always given priority to the tax committees, because it does not possess the resources to do otherwise. LFC apparently, however, gives equal priority to all committee schedules. Unless the Legislature provides funding for a much larger Tax Research Office than the current one, this difference in priorities may always exist.
Dynamic Impacts Sometimes Not Estimated
As stated above, this issue is discussed by Tom Clifford in a companion presentation.
FIRs Do Not Reflect Political Predilections
It is sometimes stated that FIRs produced by the Taxation and Revenue Department reflect political views of a particular administration because the Departments is part of the executive branch of New Mexico Government. Although it is true that analysts are employed by the executive branch of government, TRD analysts are classified (i.e., not appointed) employees. They pride themselves on producing non-partisan analysis of proposals. Moreover, as indicated above, policy analysis in fiscal impact reports follow very commonly accepted criteria described in public finance text. The criteria are commonly as known as equity and efficiency considerations. As discussed in public finance texts, the notion of equity has two major components – horizontal and vertical equity. Horizontal equity consists of treating individuals with similar economic circumstances in the same fashion. Vertical equity focuses on the question of whether groups of individuals with different economic circumstances fairly in some sense. Efficiency refers to the view that in most circumstances an extremely desirable feature of taxes consists of not providing taxpayers with incentives to change their behavior due to tax considerations. An example of the latter occurs when corporations make non-productive investments for the purpose of minimizing tax obligations. The criteria transcend partisan political considerations.
8 In some cases, similar to this, estimates are provided with associated commentary indicating assumptions that were made regarding intent of the proposal.