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Do state and local taxes affect relative state growth?

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  • Zsolt Becsi
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    Abstract

    The South has seen a remarkable economic rise during the past three decades. Was this growth a result of automatic forces or was it fueled by state and local tax policies? Traditional economic theory suggests that forces of convergence, not tax policies, have moved the southern states toward catching up with the rest of the nation. But more recent economic models recognize that convergence and low tax rates may not be mutually exclusive explanations for the South's stronger growth. ; This article presents an overview of relative state growth and relative state and local taxation from 1960 to 1992. After a brief discussion of the theoretical issues, the article surveys simple--but revealing--correlations across states and across time that characterize states' experiences. The correlations indicate convergence but also imply that shocks, including tax policy, matter for long-term growth. ; The author argues that the evidence on the growth effects of taxes has been mixed because empirical models imperfectly separate the growth effects of other government policies that occur simultaneously with tax policies. He demonstrates a simple way to get a more nearly accurate specification. His analysis shows that state and local taxes appear to have temporary growth effects that are stronger over shorter intervals and a permanent growth effect that does not disappear. ; In terms of policy implications, if long-term growth rates seem too low relative to other states, lowering aggregate state and local marginal tax rates is likely to have a positive effect on long-term growth rates. However, such a policy also reduces the progressivity of the tax system. No matter what emphasis is placed on growth, states should be aware of the potential trade-off.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

    Volume (Year): (1996)
    Issue (Month): Mar ()
    Pages: 18-36

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    Handle: RePEc:fip:fedaer:y:1996:i:mar:p:18-36:n:v.81no2

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    Keywords: Local finance ; State finance ; Taxation;

    References

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    1. Razin, Assaf & Yuen, Chi-Wa, 1997. "Factor Mobility and Income Growth: Two Convergence Hypotheses," Review of Development Economics, Wiley Blackwell, vol. 1(2), pages 171-90, June.
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    Cited by:
    1. W. Robert Reed & Cynthia L. Rogers, 2005. "Tax Cuts and Employment Growth in New Jersey: Lessons From a Regional Analysis," Urban/Regional 0506010, EconWPA.
    2. Decker, Christopher & Flynn, David, 2009. "The impact of military forts on agricultural investments on the Great Plains in 1880," MPRA Paper 19556, University Library of Munich, Germany.
    3. Kraybill, David S. & Lobao, Linda, 2001. "The Emerging Roles of County Governments in Rural America: Findings from a Recent National Survey," 2001 Annual meeting, August 5-8, Chicago, IL 20697, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Yamarik, Steven, 2000. "Can tax policy help explain state-level macroeconomic growth?," Economics Letters, Elsevier, vol. 68(2), pages 211-215, August.
    5. Zsolt Becsi, 1998. "Fiscal competition and reality: A time series approach," Working Paper 98-19, Federal Reserve Bank of Atlanta.
    6. Patrick Minford & David Meenagh & Jiang Wang, 2006. " Testing a Simple Structural Model of Endogenous Growth," CDMA Conference Paper Series 0606, Centre for Dynamic Macroeconomic Analysis.
    7. Magazzino, Cosimo & Forte, Francesco, 2010. "Optimal size of government and economic growth in EU-27," MPRA Paper 26669, University Library of Munich, Germany.
    8. Daniel G. Swaine, 1998. "What do cross-sectional growth regressions tell us about convergence?," Working Papers 98-4, Federal Reserve Bank of Boston.
    9. Minford, Patrick & Meenagh, David & Wang, Jiang, 2007. "Growth and relative living standards - testing Barriers to Riches on post-war panel data," Cardiff Economics Working Papers E2007/12, Cardiff University, Cardiff Business School, Economics Section.
    10. W. Robert Reed, 2006. "The Robust Relationship Between Taxes and State Economic Growth," Working Papers in Economics 06/13, University of Canterbury, Department of Economics and Finance.
    11. W. Robert Reed & Cynthia L. Rogers, 2006. "Tax Burden and the Mismeasurement of State Tax Policy," Public Finance Review, , vol. 34(4), pages 404-426, July.

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