State and Local Fiscal Policy and Economic Growth and Development, Working Paper 026 Open Access

The purpose of this report is to address three fundamental questions: 1. What factors determine and drive local economic growth and development? 2. How do state and local tax and expenditure policies influence economic growth and development? 3. Is there a balanced system of taxation that supports economic growth and development while not unduly burdening any particular industry or segment of the economy? We approach the project with a clear recognition that the primary engine for strong state and local economies is a strong private sector. The purpose of this report is to identify those state and local fiscal policies that facilitate and support growth in the private sector. Such state and local policies fall into two general categories: 1. traditional economic development policies primarily targeted at external sources of growth through attracting new firms or firm relocations; and 2. policies which recognize that the engine for economic growth is typically the small firm and, therefore, focus on promoting internal growth by supporting entrepreneurship and creating an environment conducive to private economic activity. To address these issues, the report is broken into six sections following this introductory section. The next section discusses what is meant by local economic growth and development. That is followed by a section, which lays out the general theoretical framework for thinking about local economic growth and development. This section is followed by a general discussion of why some metropolitan areas grow and some do not. The next section discusses the literature on which factors affect firm location and economic growth. That is followed by a discussion of the specific impact of state and local fiscal policies on local economic growth and development. The final section then discusses the notion of a balanced tax system, which promotes local economic growth and development, but does not unduly burden any individual sector of the economy.

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