Local Government Finances and Economic Growth: A Case Study Using Wisconsin General Purpose Governments

Abstract

Using a panel of Wisconsin general purpose governments the role of local fiscal policies in economic growth is explored. A three-equation growth model using population, employment, and income as measures of economic growth is estimated using a Systems Generalized Method of Moments (SGMM) estimator. Consistent with much of the literature, the data suggests that higher taxes tend to have a dampening effect on employment growth, lending support to the popular notion that high taxes lead to reduced growth rates. Yet, there is evidence that higher levels of service expenditures are associated with positive income growth rates. While the estimated coefficients tend to be negative, they are sufficiently small to be economically meaningless, suggesting that cutting taxes will have no meaningful impact on economic growth.

Keywords

taxes expenditures economic growth

Get full access to this article

View all access options for this article.

References

Akbar

P. N. G.

Edelenbos

(2021). Positioning place-making as a social process: A systematic literature review. Cogent Social Sciences, 7(1), 1905920. https://doi.org/10.1080/23311886.2021.1905920

Akın

Seyfettinoğlu

Ü. K.

(2022). Factors determining the location decision: Analysis of location choice preferences of the ICI-1000 companies with the nested logit model. Central Bank Review, 22(1), 57–75. https://doi.org/10.1016/j.cbrev.2022.03.001

Arellano

Bond

(1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297. https://doi.org/10.2307/2297968

Amiel

L. N.

Deller

Stallmann

J. I.

(2012). “Economic growth and tax and expenditure limitations.” Review of Regional Studies, 42(3): 185–206. https://doi.org/10.52324/001c.8099

Arellano

Bover

(1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-d

Bae

Moon

Jung

(2012). Economic effects of state-level tax and expenditure limitations. Public Administration Review, 72(5), 649–658. https://doi.org/10.1111/j.1540-6210.2012.02571.x

Balsas

(2022). From place-marketing to place-making, examining Boston’s case of global transformation. Local Development & Society, 3(2), 166–186. https://doi.org/10.1080/26883597.2021.1930575

Bartik

(1991). Who benefits from state and local economic development policies? W.E. Upjohn Institute for Employment Research.

Bartik

T. J.

(1992). “The effects of state and local taxes on economic development: A review of recent research.” Economic Development Quarterly, 6(1): 102–111. https://doi.org/10.1177/089124249200600110

10.

Behn

R. D.

(2003). Why measure performance? Different purposes require different measures. Public Administration Review, 63(5), 586–606. https://doi.org/10.1111/1540-6210.00322

11.

Blair

J. P.

Premus

(1987). Major factors in industrial location: A review. Economic Development Quarterly, 1(1), 72–85. https://doi.org/10.1177/089124248700100109

12.

Bloom

C. C.

(1955). State and local tax differentials. Bureau of Business Research, State University of Iowa.

13.

Blundell

Bond

(1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/s0304-4076(98)00009-8

14.

Bradshaw

T. K.

Blakely

E. J.

(1999). What are “third-wave” state economic development efforts? From incentives to industrial policy. Economic Development Quarterly, 13(3), 229–244. https://doi.org/10.1177/089124249901300303

15.

Brake

(2023). How small cities in middle America thrive: An exploration of the role of leadership and social networks. Local Development & Society, 4(1), 56–73. https://doi.org/10.1080/26883597.2021.1989986

16.

Brouwer

A. E.

Mariotti

van Ommeren

J. N.

(2004). The firm relocation decision: An empirical investigation. Annals of Regional Science, 38(2), 335–347. https://doi.org/10.1007/s00168-004-0198-5

17.

Bruce

Deskins

(2012). Can state tax policies be used to promote entrepreneurial activity? Small Business Economics, 38, 375–397. https://doi.org/10.1007/s11187-010-9262-y

18.

Buss

T. F.

(2001). The effect of state tax incentives on economic growth and firm location decisions: An overview of the literature. Economic Development Quarterly, 15(1), 90–105. https://doi.org/10.1177/089124240101500108

19.

Butters

R. A.

Sacks

D. W.

Seo

(2022). How do national firms respond to local cost shocks? American Economic Review, 112(5), 1737–1772. https://doi.org/10.1257/aer.20201524

20.

Button

(2019). Do tax incentives affect business location and economic development? Evidence from state film incentives. Regional Science and Urban Economics, 77, 315–339. https://doi.org/10.1016/j.regsciurbeco.2019.06.002

21.

Campbell

A. K.

(1958). Taxes and industrial location in the New York metropolitan region. National Tax Journal, 11, 195–218.

22.

Carlino

G. A.

Mills

E. S.

(1987). The determinants of county growth. Journal of Regional Science, 27(1), 39–54. https://doi.org/10.1111/j.1467-9787.1987.tb01143.x

23.

Chen

B. L.

(2006). Economic growth with an optimal public spending composition. Oxford Economic Papers, 58(1), 123–136. https://doi.org/10.1093/oep/gpi045

24.

Collins

Kemsley

Lang

(1998). Cross-jurisdictional income shifting and earnings valuation. Journal of Accounting Research, 36(2), 209–229. https://doi.org/10.2307/2491475

25.

Conroy

Deller

Tsvetkova

(2016). Regional business climate and interstate manufacturing relocation decisions. Regional Science and Urban Economics, 60, 155–168. https://doi.org/10.1016/j.regsciurbeco.2016.06.009

26.

Conroy

Deller

Tsvetkova

(2017). Interstate relocation of manufacturers and business climate. Review of Urban and Regional Development Studies, 29(1), 18–45. https://doi.org/10.1111/rurd.12057

27.

Deller

(2021). Are we in the 4th wave of economic development? Review of Regional Studies, 51(3), 233–245. https://doi.org/10.52324/001c.30813

28.

Deller

(2025). Are we at an inflection point in community economic development? The 4^th wave. Economic Development Quarterly. published first on-line May 28, 2025. https://doi.org/10.1177/08912424251339139

29.

Deller

S. C.

Kures

Conroy

(2019). Rural entrepreneurship and migration. Journal of Rural Studies, 66, 30–42. https://doi.org/10.1016/j.jrurstud.2019.01.026

30.

Deller

S. C.

Nelson

C. H.

Walzer

(1992). Measuring managerial efficiency in rural government. Public Productivity & Management Review, 15(3), 355–370. https://doi.org/10.2307/3380616

31.

Deller

S. C.

Tsai

T. H.

Marcouiller

D. W.

English

D. B.

(2001). “The role of amenities and quality of life in rural economic growth.” American journal of agricultural economics, 83(2): 352–365. https://doi.org/10.1111/0002-9092.00161

32.

Deller

Maher

(2009). Government, effectiveness, performance, and local property values. International Journal of Public Administration, 32(13), 1182–1212. https://doi.org/10.1080/01900690903267091

33.

Deller

Stallmann

J. I.

Amiel

(2012). The impact of state and local tax and expenditure limitations on state economic growth. Growth and Change, 43(1), 56–84. https://doi.org/10.1111/j.1468-2257.2011.00577.x

34.

Deskins

Hill

(2010). Have state tax interdependencies changed over time? Public Finance Review, 38(2), 244–270. https://doi.org/10.1177/1091142110367856

35.

Dsouza

Carroll-Scott

Bilal

Headen

I. E.

Reis

Martinez-Donate

A. P.

(2023). Investigating the measurement properties of livability: A scoping review. Cities & Health, 7(5), 839–853. https://doi.org/10.1080/23748834.2023.2202894

36.

Due

J. F.

(1961). Studies of state-local tax influences on location of industry. National Tax Journal, 14(2), 163–173. https://doi.org/10.1086/ntj41790839

37.

Dye

T. R.

Feiock

R. C.

(1995). State income tax adoption and economic growth. Social Science Quarterly, 76(3), 648–654. https://www.jstor.org/stable/44072656

38.

Eisinger

P. K.

(1988). The rise of the entrepreneurial state. State and local economic development policy in the United States. WI: University of Wisconsin Press.

39.

Frank

Kunz

D. K.

(2025). The need to reconnect public administration education, research, and practice. Administration & Society, 57, 310–335. https://doi.org/10.1177/00953997241283706

40.

Gabe

T. M.

(1996). Are tax incentives for economic development rational? Journal of Regional Analysis and Policy, 26(1), 99–112. https://doi.org/10.22004/ag.econ.130422

41.

Gabe

T. M.

Kraybill

D. S.

(2002). The effect of state economic development incentives on employment growth of establishments. Journal of Regional Science, 42(4), 703–730. https://doi.org/10.1111/1467-9787.00278

42.

Giroud

Rauh

(2019). State taxation and the reallocation of business activity: Evidence from establishment-level data. Journal of Political Economy, 127(3), 1262–1316. https://doi.org/10.1086/701357

43.

Goodsell

C. T.

(2021). Public administration scholarship: Revisiting the applied function. American Review of Public Administration, 51(7), 487–491. https://doi.org/10.1177/02750740211016005

44.

Guo

(2023). The effects of state business taxes on plant closures: Evidence from unemployment insurance taxation and multi-establishment firms. Review of Economics and Statistics, 105(3), 580–595. https://doi.org/10.1162/rest_a_01076

45.

Howitt

(2007). Accounting for trends in productivity and R&D: A schumpeterian critique of semi-endogenous growth theory. Journal of Money Credit and Banking, 39(4), 733–774. https://doi.org/10.1111/j.1538-4616.2007.00045.x

46.

Han

Xiong

Frank

H. A.

(2020). “Public Administration and Macroeconomic Issues: Is this the Time for a Marriage Proposal?” Administration & Society, 52(9): 1439–1462. https://doi.org/10.1177/0095399720915292

47.

Hanson

Rohlin

(2011). Do location-based Tax incentives attract new business establishments? Journal of Regional Science, 51(3), 427–449. https://doi.org/10.1111/j.1467-9787.2010.00704.x

48.

Harger

Ross

(2016). Do capital tax incentives attract new businesses? Evidence across industries from the new markets tax credit. Journal of Regional Science, 56(5), 733–753. https://doi.org/10.1111/jors.12286

49.

Hatry

H. P.

(1978). The status of productivity measurement in the public sector. Public Administration Review, 38(1), 28–33. https://doi.org/10.2307/975407

50.

Henry

M. S.

Barkley

D. L.

Bao

(1997). The hinterland's stake in metropolitan growth: Evidence from selected southern regions. Journal of Regional Science, 37(3), 479–501. https://doi.org/10.1111/0022-4146.00065

51.

Holcombe

R. G.

Lacombe

D. J.

(2004). The effect of state income taxation on per capita income growth. Public Finance Review, 32(3), 292–312. https://doi.org/10.1177/1091142104264303

52.

Hoogstra

G. J.

van Dijk

Florax

R. J.

(2017). Do jobs follow people or people follow jobs? A meta-analysis of Carlino–Mills studies. Spatial Economic Analysis, 12(4), 357–378. https://doi.org/10.1080/17421772.2017.1340663

53.

Jarema

P. M.

Halstead

J. M.

(2015). The relationship between social capital and ecosystem services: a regional analysis. In Halstead

J. M.

Deller

S. C.

(Eds.), Social capital at the Community Level (pp. 134–154). Routledge.

54.

Jeffres

L. W.

Bracken

C. C.

Jian

Casey

M. F.

(2009). The impact of third places on community quality of life. Applied Research in Quality of Life, 4, 333–345. https://doi.org/10.1007/s11482-009-9084-8

55.

Kelly

Ruther

Ehresman

Nickerson

(2017). Placemaking as an economic development strategy for small and midsized cities. Urban Affairs Review, 53(3), 435–462. https://doi.org/10.1177/1078087416657895

56.

Kemsley

(1998). The effect of taxes on production location. Journal of Accounting Research, 36(2), 321–341. https://doi.org/10.2307/2491480

57.

Klassen

Lang

Wolfson

(1993). Geographic income shifting by multinational corporations in response to tax rate changes. Journal of Accounting Research, 31(Supplement), 141–173. https://doi.org/10.2307/2491168

58.

Kures

Deller

S. C.

(2023). Growth in commuting patterns and their impacts on rural workforce and economic development. Economic Development Quarterly, 37(1), 54–63. https://doi.org/10.1177/08912424221145173

59.

Ladd

H. F.

(1998). Local government tax and land use policies in the United States: Understanding the links. Edward Elgar.

60.

Leicht

K. T.

Jenkins

J. C.

(1994). Three strategies of state economic development: Entrepreneurial, industrial recruitment, and deregulation policies in the American states. Economic Development Quarterly, 8(3), 256–269. https://doi.org/10.1177/089124249400800303

61.

Loveridge

(1996). On the continuing popularity of industrial recruitment. Economic Development Quarterly, 10(2), 151–158. https://doi.org/10.1177/089124249601000202

62.

Lynch

R. G.

(2004). Rethinking growth strategies: How state and local taxes and services affect economic development. Economic Policy Institute.

63.

Maher

C. S.

Park

McDonald

B. D.

Deller

S. C.

(2023). Understanding municipal fiscal health: A model for local governments in the USA. Routledge.

64.

Mandl

Dierx

Ilzkovitz

(2008). The effectiveness and efficiency of public spending. No. 301. Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

65.

Manzoor

(2014). A look at efficiency in public administration: Past and future. Sage Open, 4(4), 2158244014564936. https://doi.org/10.1177/2158244014564936

66.

McGuire

T. J.

(1992). Who benefits from state and local economic development policies?. By TIMOTHY J. Bartik. National Tax Journal, 45(4), 457–459.

67.

Mulligan

G. F.

Vias

A. C.

Glavac

S. M.

(1999). Initial diagnostics of a regional adjustment model. Environment and Planning A, 31, 855–876. https://doi.org/10.1068/a310855

68.

Munongo

Akanbi

O. A.

Robinson

(2017). Do tax incentives matter for investment? A literature review. Business and Economic Horizons, 13(2), 152–168. https://doi.org/10.15208/beh.2017.12

69.

Oakland

W. H.

(1978). Local taxes and intra-urban industry location: A survey. In Break

G. F.

(Ed.), Metropolitan financing and growth management policies (pp. 13–30). University of Wisconsin Press.

70.

Pan

Conroy

Tsvetkova

Kures

(2020). Incentives and firm migration: An interstate comparison approach. Economic Development Quarterly, 34(2), 140–153. https://doi.org/10.1177/0891242420917756

71.

Rickman

Wang

(2020). US state and local fiscal policy and economic activity: Do we know more now? Journal of Economic Surveys, 34(2), 424–465. https://doi.org/10.1111/joes.12316

72.

Rickman

D. S.

Wang

(2018). Two tales of two US states: Regional fiscal austerity and economic performance. Regional Science and Urban Economics, 68, 46–55. https://doi.org/10.1016/j.regsciurbeco.2017.10.008

73.

Rohlin

Rosenthal

S. S.

Ross

(2014). Tax avoidance and business location in a state border model. Journal of Urban Economics, 83, 34–49. https://doi.org/10.1016/j.jue.2014.06.003

74.

Shaffer

R. E.

Deller

S. C.

Marcouiller

(2004). Community Economics: Linking Theory and Practice. Blackwell Professional Publishing.

75.

Sirkin

(1959). The theory of the regional economic base. Review of Economics and Statistics, 41(4), 426–429. https://doi.org/10.2307/1927271

76.

Slattery

Zidar

(2020). Evaluating state and local business incentives. Journal of Economic Perspectives, 34(2), 90–118. https://doi.org/10.1257/jep.34.2.90

77.

Stallmann

J. I.

Deller

(2010). Impacts of local and state tax and expenditure limits on economic growth. Applied Economics Letters, 17(7), 645–648. https://doi.org/10.1080/13504850802297954

78.

Stallmann

J. I.

Deller

S. T. E. V. E. N

. (2011). State tax and expenditure limitations, business climate, and economic performance. Public Budgeting & Finance, 31(4), 109–135. https://doi.org/10.1111/j.1540-5850.2011.00995.x

79.

Timmer

M. P.

Inklaar

O'Mahony

Van Ark

(2011). Productivity and economic growth in Europe: A comparative industry perspective. International Productivity Monitor, 21, 3.

80.

U.S. Census Bureau. Individual State Descriptions: 2022 Census of Governments. Report no. G22‑CG‑ISD. Washington, DC: U.S. Department of Commerce, Commerce Library, April 30, 2024.

81.

Vedder

(1990). Tiebout, taxes, and economic growth. Cato Journal, 10(1), 91–108.

82.

Veréb

Marques

Madureira

Marques

Keryan

Silva

(2024). What is rural well-being and how is it measured? An attempt to order chaos. Rural Sociology, 89(2), 239–280. https://doi.org/10.1111/ruso.12536

83.

Wagner

J. E.

Deller

S. C.

(1998). Measuring the effects of economic diversity on growth and stability. Land Economics, 74(4), 541–556. https://doi.org/10.2307/3146884

84.

Wasylenko

M. J.

(1980). Evidence of fiscal differentials and intrametropolitan firm relocation. Land Economics, 56(3), 339–1278. https://doi.org/10.2307/3146036

85.

Wasylenko

M. J.

(1981). The location of firms: The role of taxes and fiscal incentives. Urban Affairs Annual Review, 20, 339–349.

86.

Watson

Deller

(2017). Economic diversity, unemployment and the Great Recession. Quarterly Review of Economics and Finance, 64, 1–11. https://doi.org/10.1016/j.qref.2016.12.003

87.

Wen

Kim

Warner

M. E.

(2020). Starving counties, squeezing cities: Tax and expenditure limits in the U.S. Journal of Economic Policy Reform, 23(2), 101–119. https://doi.org/10.1080/17487870.2018.1509711