Joseph M. Phillips

The Effect of State and Local Taxes on Economic Development: A Meta-Analysis

Economists and policy makers have long questioned the effect of state and local taxes on economic development. According to Schmenner [55], economists have long argued that taxes had little impact on business location decisions, while development practitioners and elected officials ignored this advice and aggressively pursued development by using tax incentives. More recent research using improved data and methodologies has begun to show that taxes can make a difference, and the emerging consensus among economists now says that taxes do matter. This changing view among researchers is perhaps best exemplified in a 1991 study by Timothy J. Bartik [2]. Bartik examined 84 econometric studies completed since 1979 which assess the impact of state and local taxes on economic growth in the U.S. He concluded that the long run elasticity of business activity with respect to state and local taxes was between -.10 and -.60 for studies focusing on intermetropolitan or interstate business economic activity and between -1.0 and -3.0 for intrametropolitan areas. However, Bartiks study did not control for a variety of study characteristics that may have influenced the measured elasticity. This study builds upon Bartiks analysis by performing a meta-analysis of the studies Bartik reviewed. Meta-analysis is a method for statistically analyzing results across empirical studies. Though it has been little used by economists, researchers in psychology, education, and health sciences have used meta-analysis extensively. This study uses a meta-analytic technique suggested by Stanley and Jarrell [57] to analyze the studies reviewed by Bartik. The technique yields increased precision for our understanding of the relationship between state and local taxes and economic development. The objective of this study is two-fold: first, to derive a more precise estimate of the tax elasticity and, second, to determine how the inclusion and omission of key variables in the estimated equations influences the elasticity estimates.

Do Business Tax Incentives Contribute to a Divergence in Economic Growth

A lack of detailed data on state tax incentive programs has limited the assessment of their economic impacts. However, in 1987, the Nebraska legislature, as part of its new business tax incentive initiative, required that the state Department of Revenue collect data on all business tax incentive agreements and report findings yearly. Nebraska’s legislative mandate produced a unique data set for assessing the impact of a business tax incentive program. Using these data, this article evaluates business tax incentives across Nebraska’s 93 counties during 1987 to 1995 and concludes that qualifying business investment (a) had a positive and statistically significant impact on economic growth for low-unemployment counties, (b) had no statistically significant impact on economic growth for high-unemployment counties, and (c) tended to be undertaken in areas with historically higher investment activity, thus contributing to greater economic performance differences among counties in the state.

The Effect of State Economic Development Agency Spending on State Income and Employment Growth

This study investigates the effect of state economic development (ED) agency spending on state income and employment growth using data from the 1986-1994 period. The study finds that ED spending has a modest positive effect on the generation of state income and employment, even after controlling for the negative effect of collecting taxes to fund ED spending. It is estimated that a doubling of state ED spending (on average

The Impact of Tax Incentives: Do Initial Economic Conditions Matter?

71.5 million in 1992)funded by an increase in taxes would raise the yearly average employment growth rate by 0.16% (from 1.52% to 1.68%) and the yearly average per capita income growth rate by 0.22% (from 4.07% to 4.29%). The study also finds that ED spending interacts with state and local taxes, so that the negative effect of taxes on economic growth is underestimated when ED spending is omitted from the analysis.

The Relationship Between Budget Deficits and Capital Inflows: Further Econometric Evidence

Do the returns to business tax incentives differ according to the initial economic conditions of the area providing tax relief? Past research studies have provided conflicting answers to this question. Bartik (1991) concluded that rates of return to business tax incentives are likely to be greater for less affluent areas than for wealthier areas offering equivalent incentives. In contrast, Fisher and Peters (1998) determined that tax incentives tend only to offset higher taxes on businesses located in low income areas. This study examines this issue using a unique data set that allows for a fresh look at this issue. We find that the returns to subsidized investment are greater in lower unemployment and higher income areas. This suggests that tax incentives reinforce pre-existing economic differences across areas. Copyright 2001 Gatton College of Business and Economics, University of Kentucky.

How Information Technology Affects Wages: Evidence Using Internet Usage As a Proxy for IT Skills

This research note examines the impact of federal deficits on U.S. capital inflows. Expanding on the previous work of Bahamani-Oskooee and Payesteh (1994), we employ the relatively new maximum likelihood procedure developed by Johansen (1988) and Johansen and Juselius (1990) to do cointegration tests. The results find a long run relationship between budget deficits and capital inflows. In addition, findings from error-correlation modeling reveal that short-run disequilibria in financial markets are corrected very rapidly, suggesting that these markets are efficient.