Local Government Tax and Land Use Policies in the United States: Understanding the Links

Helen F. Ladd

Any tax that affects economic activity may affect land use. For example, a 7 per cent retail sales tax in the state of Connecticut would reduce retail activity in the state even if no consumer responded to the tax by purchasing consumer goods in other states. Consumers would simply cut back on their consumption of taxed goods, which in turn would force some retailers out of business and reduce the size of others. The impact of the Connecticut sales tax on economic activity and land use would be even larger if some Connecticut consumers tried to avoid the tax by shopping in other states. In general, taxes will exert larger effects on land use patterns when the tax induces movement outside the taxing jurisdiction than when it does not.

Analogously, other taxes also have effects on land use, so that the overall effect of taxes on a state's land use depends on the composition of the state's taxes. Moreover, because neighbouring communities are likely to be better substitutes for the residential, shopping and working needs of households than are neighbouring states, the impacts on land use of decisions about the mix and level of taxes are likely to be even greater at the local than at the state level.

Most of the controversy about the land use effects of taxes relates to the effect of taxes on the location and investment decisions of firms. On the one hand, legislators and city council members throughout the county are frequently induced to reduce business taxes or provide generous tax abatements to particular firms in response to the (often vocal and well financed) claims of business firms that high taxes will lead them to invest elsewhere. On the other hand, economists have, until recently, been surprisingly unified in their view that taxes do not matter very much, and that tax abatements are typically tax giveaways. However, a spate of new studies has recently challenged the conventional wisdom of economists.

The effectiveness, or lack thereof, of explicit attempts by state or local governments to influence economic activity through tax policy tools such as abatements or enterprise zones is reserved for a later chapter. This chapter focuses research about the unintended effects of state or local tax decisions on economic activity. While the distinction between tax policies that have

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