William F. Fox

Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics

We examine the relative dynamic responses of state personal tax revenues and sales tax bases to changes in state personal income. Our econometric analysis, which includes separate analyses of long-run and short-run dynamics for each state, permits the estimation of asymmetric short-run responses depending upon the relationship between current and expected tax base growth. Results indicate that the average long-run elasticity for income taxes is more than double that for sales taxes. Most states have asymmetric short-run income elasticities, which are again greater for income taxes than for sales taxes. However, a joint analysis of long- and short-run dynamics reveals that neither tax is universally more volatile. After calculating state-specific income elasticities for both taxes, we employ cross-section regression techniques to explain the variation in elasticities across states. Several policy factors are found to be important, including elements of tax bases and rate structures.

Investing in Rural Infrastructure

Infrastructure is best envisioned as services that come from a set of public works, not as physical facilities. In concept, infrastructure can expand rural economies by raising productivity levels, allowing expansion in the use of other resources, and attracting resources. Empirical research evidences that at the margin, the net effect of the three factors is for infrastructure to have only a modest effect on economic performance. Infrastructure investments will normally have their biggest impact in economically integrated and intermediate rural areas. Nonetheless, a basic complement of infrastructure is essential to support economic activity, but this set should be seen as accommodating rather than causing growth. Local, market-based approaches are normally the best way to develop the infrastructure and to ensure that an area has the basic infrastructure that can be maintained, supported, and used effectively.

Local Public Policies and Interregional Business Development

A key consideration in the formulation of local government public policies is their expected influence on economic development. There is limited information on the sensitivity of economic development to specific local policies, and fearing the worst, policymakers are prone to oppose actions which appear to raise business costs, such as taxes, and fail to give full consideration to offsetting benefits which are often derived from expenditures. Through these actions local governments can be perceived as engaging in tax competition, using a mix of strategies and employing tools such as infrastructure, tax structure, and public services. Differing views on whether such competition promotes efficiency have been espoused. Public finance economists have frequently stated that tax competition is counterproductive, though McLure [8] and others have argued that its benefits are likely to be substantial. Whichever view is eventually supported, the issue remains whether the competition and resulting choice of public policies actually influence business locations and start-ups. The current paper is a comprehensive, consistent examination of the effects of a wide-ranging set of local public policies on interregional business location and start-up decisions. Aspects of the contributions offered by this paper have been included in the work of other authors, but no previous work has provided a systematic examination of the issues. First, this research, though confined to an individual state, is interregional as it measures the effect of public policies across wide geographic areas, including seven metropolitan areas and numerous rural counties. Second, the basis for analysis is firm-specific locations and start-ups which are measured using unemployment insurance records covering all industries. This allows for analysis of industry locations across all sectors. Bartik [1] and Carlton [4; 5] use firm level data for manufacturing industries and selected subsectors. The data used here permit analysis of actual firm locations across all industries and allow a distinction to be made between firms entering the economy, firms expanding or contracting, and those exiting the economy. Other researchers, such as Wasylenko and McGuire [15], study determinants of manufacturing and nonmanufacturing employment, but the data are for net employment changes, and as a result are not specific to newly locating firms.

Do Economic Effects Justify the Use of Fiscal Incentives

The siting of a large, new firm is often presumed to give rise to significant economic and tax benefits to the community of location. This presumption serves as the basis for the granting of lucrative economic development incentives to footloose businesses. This article examines whether large, mobile firms generate significant net benefits for the region of location. Panel data and nonrandom estimation techniques are applied to a primary database of large firms that made location decisions in the 1980s to explore the impact of location on regional economic performance. The empirical analysis explores different treatment regions (both effects within the county and the metropolitan statistical area [MSA] of location) and different control regions. The results show that large firms fail to produce significant net benefits for their host communities, calling into question the high-stakes bidding war over jobs and investment.

Strategic options for urban infrastructure management

Experience of past decades confirms that the solution to infrastructure problems is not merely to expand capacity by making new investments. Much more systematic changes must be undertaken if service delivery is so to attain the standards necessary to improve quality of life and allow economic output to expand more rapidly. This paper identifies several broad areas for reform and recommends a series of actions to attain service delivery.

Sustainability of potable water services in the Philippines

Financial sustainability of rural water systems in the Philippines is evaluated based on a comparison of willingness to pay for improved water and the costs of service delivery. Willingness to pay estimates indicate that user fees are unlikely to be sufficient to cover the full cost of service and subsidies are necessary, at least for a major portion of capital costs, or the water systems will become unsustainable because of insufficient resources. Sustainability is more probable when care is exercised in selecting villages for improved water services. Economies of scale lead to lower unit costs in larger villages. Willingness to pay is greater for household connections than for public faucets. Willingness to pay increases with income and wealth, family size, education, and dissatisfaction with traditional water sources.

On The Extent, Growth, and Efficiency Consequences of State Business Tax Planning

Our focus in this essay is on the extent to which tax planning in response to variations in state tax policy has affected state corporate income tax bases and revenues. Tax planning is defined as a broad set of actions undertaken by firms to reduce their tax liability. Financial or accounting tax planning is contrasted with what we refer to as locational distortions, in which firms move physical operations to avoid higher tax liabilities. Results from a fixed effects instrumental variables regression model using a 1985-2001 panel of state-level data provide highly suggestive evidence that tax planning activity significantly diminishes taxable corporate profits in high tax states. Specifically, we find that state corporate income tax bases decline by nearly 7 percent following a one- percentage-point increase in the top marginal corporate income tax rate, controlling for locational distortions. We also find that throwback rules are usually ineffective in restoring corporate income tax bases while combined reporting requirements are often effective. Further analysis indicates that tax planning has not diminished the locational distortions of tax policy.

Local Taxes and Industrial Location

A model is developed which focuses on the relationship between fiscal variables and industrial location. Industrial location decisions are hypothesized to be made within a system of supply and demand. On the supply side, communities determine the optimal level of industrial activity based on a trade-off between tax revenues and the local environment. Firms choose between sites so as to minimize costs. The marginal prices of education and environment faced by communities are derived, and from these we get a supply of industrial sites equation which reveals how much industry a given community would be willing to accept. One conclusion is that the communitys behavior in the setting of tax rates, business services, and zoning can have significant impacts on the location of industry. Another result is that the property tax is not an excess burden, but allows efficient market principles to be applied to the location of industry.

The Effect of Federal Policies On Local Public Infrastructure Investment

The linkage between federal policy and municipal investment decisions is empirically estimated. The findings of this article indicate that federal policies should be designed with recognition of the potential effects on local investment decisions. Deductibility of state and local taxes is found to have a strong effect on demand for investment. Intergovernmental aid appears to have a small positive influence on investment demand. Investment demand is estimated to have grown after passage of the Tax Reform Act of 1986 (TRA86). Because TRA86 eliminated sales tax deductibility, this suggests that sales taxes are not used at the margin to finance investments. Factors not related to federal tax policy, such as mandates, must explain the subsequent investment growth. Evidence is found that federal policies can increase investment by influencing municipal willingness to issue debt, as measured by the percentage of resources raised through debt. However, the effect disappears when the debt share is simultaneously estimated with investment demand

DO LIMITED LIABILITY COMPANIES EXPLAIN DECLINING STATE CORPORATE TAX REVENUES

The effective state corporate tax rate fell significantly during the past fifteen years despite the very robust growth in corporate book profits. This article examines the causes of the decline with a focus on the effects of the relatively new option of forming limited liability companies (LLCs), state tax policy, and changes in the federal base. The effects are estimated using a simultaneous equation model and a twelve-year panel for U.S. states. The results confirm that the advent and growth of LLCs have been important causes of the decline in corporate tax revenues. In addition, changes in the federal corporate tax base, the propensity of states to grant tax incentives, and the failure of states to require combined reporting have been significant factors in falling corporate tax revenues.