Study: Local taxes don’t slow growth

Taxing and spending by Wisconsin counties and municipalities are not so high that they are putting the brakes on local economic growth, according to a university study.

“Yes, we do spend a lot in Wisconsin,” says Steve Deller, who has studied the economic development of Wisconsin communities for the past 10 years. “But people in Wisconsin expect high quality public services and have been willing to pay for them.

“Whether people in local communities are getting their money’s worth is a different issue,” he says. “Are local governments spending efficiently? Would it be better if some worked together to provide services, or contracted for the services? Those questions also need to be examined. The governor’s proposed budget, which would phase out shared revenues, is causing communities to reevaluate the issue. And that’s all to the good.”

Deller, an extension economist with the College of Agricultural and Life Sciences, says economists have found that taxation level does influence economic growth. But it’s only one of many factors.

To isolate the influence of taxation and spending on economic growth, the researchers used a method that eliminates the effects of other factors. They examined the tax rates and growth rates of 70 governmental units across the state between 1990 and 1998. Because of the way the government gathers information on taxation and growth, those units roughly approximate 70 of Wisconsin’s counties and the municipalities in each.

The study looked at the taxes used to administer local government and provide for health and human services, roads, parks, and police and fire protection. The study did not include taxes spent on local schools because of the unique manner in which public schools are financed in Wisconsin.

When economists look at the relationship between taxes and economic growth, they find that growth and expenditure levels, and the corresponding levels of taxation, tend to increase in tandem to a point, according to Deller. But after that point, increases in spending and tax rates can cause economic growth rates to decline.

“Using this approach we found no systematic evidence that taxation levels and spending rates are so high that it was inhibiting the local economy,” Deller says. Based on the results of this and other studies conducted by Deller, there does not appear to be strong evidence that Wisconsin’s reputation as a high “tax and spend” state, specifically at the local level, has hindered the economic growth of the state.

The study also looked further at the types of spending that were most closely associated with strong economic growth. The researchers found that the effects of expenditures on growth were greatest when the spending increases were for transportation and health and human services. The economists did not find significant relationships between economic growth and increased spending for public safety.