Business Climate, Taxes, and Economic Development

Abstract

This article reviews the treatment given to state and local fiscal policy by modern business climate studies and contrasts it with research findings. Empirical evidence on the impact of tax differentials on economic growth has undergone major changes in recent years. Tax rates, when observed in isolation, are now widely believed to have a negative impact on state and local economic growth. This shift in consensus lends support to the major business climate studies that assign a prominent role to taxes. Unfortunately, most current business climate studies are too simplistic to provide a useful guide for economic development policy. In particular, the tax variables used in the studies are overly aggregative and government expenditures are virtually ignored. By contrast, recent empirical research that examines both sides of the budget and utilizes econometric analysis provides information that has the potential to enhance the efficiency and flexibility of economic development strategy.

Environmental Protection Versus Economic Development: A False Trade‐Off?

“…Research that investigates patterns of state economic growth and the link between state policies and economic performance has flourished in recent years. This literature has focused upon the impacts of investment inducements, tax levels, spending patterns, and federal transfers on private production costs and economic growth (Brace 1993;Jones 1990;Steines 1984;Warner 1987). Despite the importance of environmental regulatory costs to overall costs of production, surprisingly little attention has been paid to the effects of these regulatory requirements on state economic performance.…”

The Growth of Enterprise Zones: A Policy Transformation

“…Although some researchers have been successful in detecting positive impacts of tax incentives on firms' location decisions, eqiecially through more careful model specification (Wamer, 1988(Wamer, , 1989Newman & Sullivan, 1988), published research overwhelming suggests skepticism over the possibility that "pure" enterprise zone incentives alone could generate enough investment and jobs to offset costs of administering the programs; rather, the increasing importanceofotho-"quality of life" factors emerges,a]ong withenergy, market access, and labor,askey factors (Wasylenko, 1981;Kieschnick, 1981;Plaut & Pluta, 1982;Steinnes, 1984;Funkhouser & Lorenz, 1987;Blair & Premus, 1987;Vaughan, 1988;Wamer, 1989).…”

Something New or More of the Same in the Bidding Wars for Big Business?

“…Although government officials point to corporate investment and jobs when their jurisdiction “wins” a bidding war, it is extremely difficult to determine how effective the subsidies actually were. On the one hand, while corporate executives are understandably loath to admit that public incentives are merely the “icing on the cake,” surveys and empirical analyses of the company locational decision‐making process indicate that state and local incentives have more influence on locational decisions within rather than between regions (Blair and Premus ; Warner ; Wilson ). Companies usually narrow down their locational choice to a particular region based on vital regional differences in production factors, such as the quality and cost of labor (Tosh, Festervand, and Lumpkin ).…”