The Effects of State and Local Taxes on Economic Development: A Review of Recent Research

Abstract

This review summarizes recent research on the effects of state and local taxes on state and local business activity. Contrary to previous research, this recent research indicates that state and local taxes have statistically significant negative effects on the economic growth of a state or metropolitan area. However, the range of plausible tax effects is large, implying that the annual costs of creating one job could vary from $2, 000 to $11, 000. For small suburban jurisdictions, taxes have more powerful effects on business growth than is true for metropolitan areas or states. These effects are so powerful that a cut in business property tax rates could plausibly raise revenue for a suburb.