Local Taxes, Public Services, and the Intrametropolitan Location of Firms and Households

Abstract

This work examines the effects of local public sector tax and spending decisions on the intrametropolitan location of jobs and workers. Municipality-level data for the entire Philadelphia metropolitan area are used to estimate a two equation partial adjustment model of firm and household location. Effective local property and income tax rates and spending data for three (exhaustive) service categories are included. The model is estimated for total employment and six sectors The findings imply that employment location is more sensitive to local government activities than is household location. Firms m most sectors react to both tax and spending policies. The effects on employment of local tax increases can be partially offset if the higher taxes supplement particular types of spending. However, differences across sectors imply that the net effect on total employment will be negative except in very special circumstances. Household behavior, on the other hand, is affected only by school spending. The findings also imply that models based on highly aggregated measures of employment or economic activity understate the speed of adjustment of the system, resulting in overstated estimates of long-run tax and spending effects.