Distributed test data compression refers to the scenario where each logic block in a design has its own decompression logic and compact set of compressed tests. A static test compaction procedure for this scenario was described recently. The procedure accepts compact compressed test sets for the logic blocks. It combines the test sets into a single shared test set and optimizes it for all the logic blocks. This article describes a dynamic test compaction procedure for the same scenario. The procedure starts from an empty shared test set and considers the logic blocks one by one. It increases the fault coverage of the shared test set either by adding a compressed test or by extending a compressed test already included in the shared test set. Experimental results presented for groups of benchmark circuits demonstrate significant sharing that leads to a significant reduction in the storage requirements for tests.