Taxes and Economic Development: An Update on the State of the Economics Literature

Abstract

There is a large literature examining the effect of taxes and tax concessions on local economic development. The last comprehensive review of taxes and economic development, however, was Wasylenko’s review in 1997, which mostly examined the location response of firms. Subsequent to the last major review of the literature, empirical work in this area sought to address endogeneity concerns that plagued previous studies, resulting in a series of compelling new studies. This article reviews the empirical literature on tax-based economic development incentives produced since Wasylenko’s 1997 review and covers property tax (including tax increment financing and business improvement districts); spatially targeted and zone-based tax concessions; firm-specific incentives; and corporate income taxes. The review focuses on academic studies that employ modern program evaluation or quasi-experimental techniques and U.S.-based policies.