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Hedonic analysis of state and local fiscal policy on nonmetropolitan economic development

Yu, Yihua
Scope and Method of Study: Following the quality-of-life hedonic pricing approach of Rosen (1979) and Roback (1982) as extended to fiscal conditions by Gyourko and Tracy (1989; 1991), this paper examines how state and local government taxes and expenditures affect the location decisions of households and firms in U.S. nonmetropolitan areas. We consider comprehensively the government budget constraint, sample heterogeneity, fixed effects, endogeneity, and spatial correlation in modeling.
Findings and Conclusions: This study finds that growth of the state tax variables (general sales tax, individual income tax, corporate income tax, selective, license taxes) generally are negatively associated with both wage and rent growth, reflecting the households' diamenity and firms' counter-productivity effects, which is in accordance with the theory that greater taxes increase business cost and discourage labor supply.
This study also finds that the state expenditures on first-secondary education, highway, and public safety are positively associated with wage and rent. This result indicates that education, highway, or public safety have both amenity and productivity effects, in addition, the productivity effects of these the expenditure variables would have to dominate their amenity effects to be consistent with the positive sign in the wage model. These results indicate that more investment in education, highway, and public safety are preferred by both households and firms.None of the existing literatures has done such fiscal study at the nonmetropolitan level.
No hedonic fiscal policy studies have been done at the non-metropolitan level, which hence is the focus of this dissertation. This study could fill the gap in the hedonic literature and should be of interest to economists and policy makers. Specifically, policy makers should be aware of the dual role of taxes and public services in affecting households and firms in their location decisions. Furthermore in order to further the economic development of nonmetropolitan territories, it is better for the state governments to lower the personal income tax and corporate income tax while still being able to maintain the education, public safety and highway expenditures on a high level.