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Do state and local taxes affect relative state growth?

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  • Zsolt Becsi

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.

Suggested Citation

  • Zsolt Becsi, 1996. "Do state and local taxes affect relative state growth?," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 18-36.
  • Handle: RePEc:fip:fedaer:y:1996:i:mar:p:18-36:n:v.81no2
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    Cited by:

    1. 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.
    2. repec:taf:teepxx:v:7:y:2018:i:1:p:85-115 is not listed on IDEAS
    3. Reed, W. Robert, 2008. "The Robust Relationship Between Taxes and U.S. State Income Growth," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(1), pages 57-80, March.
    4. Richard Funderburg & Timothy J. Bartik & Alan H. Peters & Peter S. Fisher, 2013. "The Impact Of Marginal Business Taxes On State Manufacturing," Journal of Regional Science, Wiley Blackwell, vol. 53(4), pages 557-582, October.
    5. Zsolt Becsi, 1998. "Fiscal competition and reality: A time series approach," FRB Atlanta Working Paper 98-19, Federal Reserve Bank of Atlanta.
    6. Georgeanne M. Artz & Kevin D. Duncan & Arthur P. Hall & Peter F. Orazem, 2016. "Do State Business Climate Indicators Explain Relative Economic Growth At State Borders?," Journal of Regional Science, Wiley Blackwell, vol. 56(3), pages 395-419, June.
    7. Yamarik, Steven, 2000. "Can tax policy help explain state-level macroeconomic growth?," Economics Letters, Elsevier, vol. 68(2), pages 211-215, August.
    8. W. Robert Reed & Cynthia L. Rogers & Mark Skidmore, 2008. "On Estimating Marginal Tax Rates and Tax Progressivities for U.S. States," Working Papers in Economics 08/17, University of Canterbury, Department of Economics and Finance.
    9. Zachary Horváth & Brian David Moore & Jonathan C. Rork, 2014. "Does Federal Aid to States Aid the States?," Growth and Change, Wiley Blackwell, vol. 45(2), pages 333-361, June.
    10. Monika Nováčková & Richard S. J. Tol, 2018. "Effects of sea level rise on economy of the United States," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 7(1), pages 85-115, January.
    11. 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.
    12. 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.
    13. Svec Justin & Kondo Ayako, 2012. "Fiscal Policy Cyclicality and Growth within the US States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-35, March.
    14. 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.
    15. Reed, W. Robert & Rogers, Cynthia L & Skidmore, Mark, 2011. "On Estimating Marginal Tax Rates for U.S. States," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(1), pages 59-84, March.
    16. Mark Rider, 2006. "The Effect of Personal Income Tax Rates on Individual and Business Decisions - A Review of the Evidence," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0615, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    17. Marc Tomljanovich, 2004. "The Role of State Fiscal Policy in State Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 22(3), pages 318-330, July.
    18. Daniel G. Swaine, 1998. "What do cross-sectional growth regressions tell us about convergence?," Working Papers 98-4, Federal Reserve Bank of Boston.
    19. W. Robert Reed & Cynthia L. Rogers, 2005. "Tax Cuts and Employment Growth in New Jersey: Lessons From a Regional Analysis," Urban/Regional 0506010, EconWPA.
    20. William Gbohoui & François Vaillancourt, 2016. "Sub-national Tax Policy and State Level Growth Dynamics: Evidence from U.S. States," CIRANO Working Papers 2016s-13, CIRANO.
    21. 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).
    22. 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.
    23. Magazzino, Cosimo & Forte, Francesco, 2010. "Optimal size of government and economic growth in EU-27," MPRA Paper 26669, University Library of Munich, Germany.

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    Keywords

    Local finance ; State finance ; Taxation;

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