State and Local Taxes, Transfers and Regional Economic Growth

Conflicting sets of evidence exist with respect to the effects of state and local on industry location and regional economic growth in the United States. Survey results of business firms indicate that high taxes consistently rank close to or at the top of any list of determinants of industry location. But empirical studies on relative tax burdens have generally concluded that high do not drive out business, presumably because: (1) Insofar as are higher in one state than another it may only represent a higher level of public goods production and consumption; (2) state and local government on business are rather small (relative to total costs and sales) and do not vary greatly (relative to interstate variations in factor and transport costs). Neither firms nor persons have the option of eliminating all state and local through migration [4; 8; 9; 14]. However, two tax issues which may be highly significant to regional economic growth are being ignored or otherwise circumvented by these arguments. The first is the degree of progression in the tax structure. Insofar as tax progression is greater than benefit progression in one locality relative to another, incentives exist for lower or zero income individuals to stay or enter and higher income individuals to depart. Business may act similarly insofar as the location of firms is dictated by higher income managerial personnel with personal incentives to locate in low tax progression states. The ultimate equilibrium is one of local government bankruptcy, as New York City (and to a lesser degree New York State) may well have discovered. By necessity, income redistribution through the public sector must be a Federal government function if population is geographically mobile. Put another way, given a choice between benefit versus ability-to-pay taxation, the latter may not be an economically rational option for a state or local government. Second, insofar as tax revenues are not used to finance the production of public goods and services (exhaustive expenditures) but instead finance transfer payments, there is again no flow or no perceived flow of benefits to resident firms and employed or employable indi-