Effects of Shifts in the Local Tax Base on Economic Outlook: Evidence from Kentucky Cities

Abstract: Taxes are mostly viewed as a necessary burden to fund public goods, but the optimal level of taxation is subject to much debate. Oftentimes this debate centers around the burden imposed on taxpayers and the subsequent benefits provided by the public services and amenities their taxes finance. Too often taxpayers and elected officials focus wholly on the short-term impacts of changes in tax rates and do not fully consider the possible long run effects. The City of Henderson, Kentucky recently passed a new ordinance which increased the occupational payroll tax rate and simultaneously decreased the real estate tax rate. This shift is projected to be neutral in terms of net revenue. My purpose here is to gain an understanding of how the composition of revenue might affect economic growth and the industrial composition of a city. As there is no change in net tax revenue, I expect little or no impact on economic growth. For this research project, a city\u27s economic growth is measured by population and employment in the city limits. To test this, panel data was gathered on other similar Kentucky cities to control for economic and demographic variables that otherwise might account for the changes in economic growth. My finding show limited or weak evidence of significant impacts of shifts in local tax rates on economic growth. Overall, it appears that while local taxes have a statistically significant effect on a city\u27s economic growth, they do not have a large enough impact to be considered economically significant. While the two-way fixed effects models serve as a basis on how shifts in local taxes may impact the economic development of Kentucky cities, more work will have to be done in the future to definitively prove causation. Keywords: (Occupational Payroll Tax, Property Tax, Local Taxes