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.
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