A SIMULATION MODEL OF A TAX-REDUCTION ECONOMIC DEVELOPMENT STRATEGY

A current topic of considerable interest is state-level economic development. A wide variety of strategies have been proposed to encourage the development process. Given the reality of state budget constraints, resources directed toward one option will reduce the resources available to pursue alternative actions. Thus, policy-makers are confronted with the classic economic question--Given the existing situation, how should scarce resources be used? This dissertation examines the development process using a computer-aided simulation model. Special emphasis is placed on the examination of a tax-reduction strategy. This emphasis is warranted by the particularly attractive nature of this approach to elected officials and the general public. Intuitively, it seems that lowering state taxes should improve local economic conditions. Because state taxes are a cost of doing business, one would think that lower tax rates should entice firms to move from high-tax to low-tax states. While this strategy has an initial appeal, considerable evidence can be found which indicates that reducing state taxes may be a weak development tool. In fact, the relationship between taxes and economic development is not as straight-forward as it first appears. Tax considerations are just one component in a web of inter-acting elements which cumulatively influence economic development. A tax change will ripple through this system, affecting some variables positively, but having a negative effect on others. In this situation, intuition is not a good guide to the ultimate results of a tax change. The complexity of the situation requires a systems perspective to develop policy alternatives. To accomplish this, a simulation model using Forrester\u27s system dynamics approach is developed. When changes in tax levels are stimulated, the model results indicate that decision-makers should be very cautious in using a tax-reduction strategy. In the most optimistic scenarios there is a slight increase in local employment after the tax cut. The more realistic scenarios show a decrease in local employment after the tax cut