Complete State and Local Fiscal Policy Impacts on Local Economic Growth

What is the net effect of simultaneous changes in tax rates and government spending on economic growth? This question is both of theoretical interest to economists as well as practical interest to public decision makers. Our contribution to the question is two-fold. First, we advance the theoretical content by developing a two-sector endogenous growth model and showing the effects on economic growth of five types of taxes and three categories of public spending. Second, we empirically apply the model and calculate net growth impacts of alternative combinations of tax rate and public spending changes. Our results show the net impacts on growth importantly depend on the tax and spending combination considered. Increasing corporate income tax rates, regardless of how the revenues are spent, retard economic growth. Upwardly shifting marginal individual income tax rates with the added funds spent on higher education raises economic growth, while spending the funds on K-12 public education lowers growth. Finally, simultaneously increasing gas tax rates and spending on roads raises economic growth