Fiscal Structures and Economic Growth at the State and Local Level

Abstract

State and local governments have recently experienced severe budget problems. Many state legislatures and governors have cut spending or raised taxes. Such changes in fiscal structure may restore fiscal balance, but they can have adverse consequences on state and local economic growth. This article examines the relationship between the fiscal structure of state and local government and economic growth in these jurisdictions. Several general conclusions emerge from our analysis. Corporate income taxes play too small a role in state and local finance, and sales taxes too large a role. Education, transportation, and public safety expenditures may receive too much of the fiscal pie.

The Direct and Indirect (Spillover) Effects of Productive Government Spending on State Economic Growth

“…the static results reported in Tables 2, 4, 6, and 8 indicate that, regardless of the financing source, the total effect of higher education and highway spending on growth is positive, which is consistent with previous empirical findings in the literature, such as, De La Fuente (1997) and Miller and Russek (1997) who find that productive public spending programs have positive effects on growth. Because previous studies do not control for spillover effects, the coefficient estimates on government spending or any other spending are typically smaller downplaying the effect of public spending on growth.…”

“…Kneller, Bleaney, and Gemmell () contend that the mixed evidence on the impact of taxation and public spending on growth is because these studies fail to include disaggregate taxes and expenditures in the government budget constraint. In fact, studies that have specified the government budget constraint more formally to simultaneously include different revenue sources and various expenditure categories consistently find that tax increases have contractionary effects on economic growth (Bleaney, Gemmell, and Kneller ; Kocherlakota and Yi ) while increases in various public spending programs have expansionary effects on growth (De La Fuente ; Miller and Russek ). Li and Sarte () and Lee and Gordon () have shown that there is a negative correlation between taxation and growth when the budget constraint is specified to include both revenue and public expenditure categories.…”

Tax Cuts and Employment in New Jersey: Lessons From a Regional Analysis

“…In contrast, Miller and Russek (1997) find a negative relationship between taxes and economic growth, even when tax revenues are used to finance public services.…”

Education and economic growth in the United States: cross-national applications for an intra-national path analysis

“…Table 3 reveals that spending on higher education has a significant negative relationship with college attainment and therefore a negative indirect relationship with income growth. 1976-1992 1989-1996 1989-1996 1985-1992 1998- Several scholars (Fisher 1997;Helms 1985;Miller and Russek 1997) emphasize the importance of controlling for the effects of taxation when trying to discern expenditure effects. Fisher (1997, p. 63) specifically asserts:…”

“…Last, the positive association between college attainment and income growth in the late 1990s and early 2000s may reflect the growth of the service sector and the globalization of the American economy, both necessitating a more highly skilled and educated labor force. 13 Finally, the negative association between spending on higher education and college attainment rates between 1997 and 2005 might reflect the migration of college graduates to states that do not invest as heavily in higher education (Miller and Russek 1997). This negative association may also reflect that states with the lowest investments in public higher educationMassachusetts, Connecticut, Vermont, and New Hampshire-have high per capita enrollments in private systems of higher education (Goldin and Katz 2001) that are graduating a substantial percentage of their state's population.…”