Title

Taxes and state and local economics development: The homestead tax option in New York

Date of Award

1998

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Public Administration

Advisor(s)

John Yinger

Keywords

Taxes, Economics, Homestead tax, New York

Subject Categories

Public Administration

Abstract

This is an intrastate and intermetropolitan econometric study of the effectiveness of policy tools, particularly property tax and public services, in state and local economic development. State and local economic development is important from both policy and research standpoints. While there is intense economic competition among state and local governments, recent research does not provide conclusive evidence on the effectiveness of the policy tools.

This study attempts to improve previous research in the following ways. It integrates the theories of profit-maximization, public sector production, and capitalization in its conceptual framework. It uses pooled time series data of the 61 cities in New York. The intrastate design of the study and the fixed effect and trend effect models give strong control of other major variables. Public service outcomes are used to capture more accurately the effect of public services. A special policy intervention--the Homestead Tax Option--creates significant variations in property taxes among cities and across time. The homestead tax option also provides additional information for resolving the simultaneity bias between economic development and the effective property tax rate.

Findings of the study show that property tax only has a moderate impact on employment. The moderate impact can be explained by the capitalization of property tax differentials into property and land values. Removal of the simultaneity bias by two stage least squares method does not eliminate the statistical significance of property tax. Therefore, there is a negative relationship between property tax and economic development but OLS estimates will overestimate the negative impact of property tax.

Two of the three public services tested are found to have positive impacts on employment. It implies that it is possible to promote economic development by better public service. Nevertheless, it is the unidentified variables that explain most of the variation in economic development. The findings challenge the belief that property tax is a major source of economic growth or decline and call for a shift of emphasis in policy and research from property tax to other more important variables in state and economic development.

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