Industry Migration and Growth in the South

Abstract

FOR at least the last two decades the South and Southwest have been the fastest growing regions in the United States. During this period we have witnessed considerable shifts in the location of economic activity and, overall, the movement has been decidedly toward the South. Since the early sixties, when this southern migration began to accelerate, an increasing amount of public attention has been directed to this topic; so much so that it is now popularly referred to as the Sunbelt phenomenon. Numerous explanations have been advanced to account for this rapid growth in the South, but three explanations have persistently evoked an impressive level of debate. First, many have argued that a significant portion of this regional redistribution can be attributed to differentials in state and local taxing policies; in particular the state corporate income tax. These rates vary considerably across states, but even more important is the observation that there have been significant changes in the structure of corporate taxes over the last few decades. Beginning in the early 1950s the relative tax rate' for several southern states, particularly those in the East South Central and West South Central divisions, began to decline sharply. On the other hand, relative tax rates for three divisions, New England, the East North Central and the MidAtlantic, rose in the early sixties. By 1970 the relative tax rate ranged from 0.60 in the West South Central (down from 1.20 in 1950) to 1.37 in the Mid-Atlantic (up from 1.15 in 1950). Notwithstanding these stylized facts, the consensus from previous empirical work on industry location suggests that state taxes have not influenced the direction or magnitude of industry migration. However, there are reasons to believe that acceptance of this conclusion may be premature. For example, in the early body of work, results were based on simple correlations of tax levels and changes in either value added or employment.2 More recent attempts to empirically model corporate tax effects have arrived at somewhat ambiguous results. Carlton (1977), examining three 4-digit industries, found that corporate tax differentials failed to explain any of the variation in new births of firms across SMSAs. Hodge (1979), while confirming Carlton's results for the same industries, discovered that taxes have significantly affected regional investment patterns in another industry not covered in Carlton's study.3 Why taxes mattered in one industry and not in the other three remained a matter of ad hoc speculation. A second explanation alleges that states in the South have begun to exhibit a more favorable business climate. Although it is difficult to measure directly a state's business climate, one important manifestation of that climate is its position with respect to the division of power between union and management in the collective bargaining process. Legal obstacles to union organization and bargaining power will be viewed by firms as a positive signal of a pro-business environment. The creation of legislative obstaReceived for publication October 29, 1981. Revision accepted for publication April 16, 1982. Miami University. The author is especially indebted to Michael Ward at the Rand Corporation for numerouls helpful discussions throughout the preparation of this study. Also, the author benefited from the advice and comments of John Antel, Robert Cotterman. Lee Lillard, John Lunn, William J. Moore, James Smith, Finis Welch and two referees of this REVIEW. Financial suppoI-t was provided by the Foundation for Research in Economics and Education at UCLA and the University of British Columbia Humanities and Social Sciences Committee. I The relative tax is defined as a state's tax rate divided by the average for all states. As in most economic discussions, it is relative price that matters. 2 For a review of earlier work see Due (1961). Some of the studies reviewed include Bloom (1955), Campbell (1958), Floyd (1952), and Larson (1957). See also Garwood (1952). 3 Most of the other empirical work focused exclusively on intt--urban location decisions and hence had no reason to examine state corporate taxes. However, they found local tax differentials (inter-zonal) were unimportant in determining intra-urban movement. For example, see Moses and Williamson (1967) and Schmenner (1978).