Local Government Finances and Economic Growth: A Case Study Using Wisconsin General Purpose Governments

Using a panel of Wisconsin general purpose governments the role of local fiscal policies in economic growth is explored. A three-equation growth model using population, employment, and income as measures of economic growth is estimated using a Systems Generalized Method of Moments (SGMM) estimator. Consistent with much of the literature, the data suggests that higher taxes tend to have a dampening effect on employment growth, lending support to the popular notion that high taxes lead to reduced growth rates. Yet, there is evidence that higher levels of service expenditures are associated with positive income growth rates. While the estimated coefficients tend to be negative, they are sufficiently small to be economically meaningless, suggesting that cutting taxes will have no meaningful impact on economic growth.