Employment and Firm Growthin Massachusetts:

Does Local Tax PolicyEffect Economic Activity?

William F. O’Brien, Jr.Wei Pang Lee

Worcester State CollegeWorcester, MA, USA

Important Factors in Interregional Search Plant Location

Single Plant Establishments

Single most imp.

Very imp.

Total Branch Plants Single most imp.

Very imp.

Total

Markets 32 27 59 Markets 21 28 49Labor 19 40 59 Taxes 2 39 41Land 4 50 54 Labor 11 29 40Personal Reasons 16 34 50 Land 3 32 35Taxes 3 37 40 Education 1 31 32Resources 3 32 35 Non-tax Incentives 1 31 32Proximity to Suppliers 1 30 31 Resources 8 15 23Electricity 2 28 30 Electricity 0 20 20Education 4 25 29 Proximity to Suppliers 1 15 16Amenities 5 24 29 Personal Reasons 2 12 14

Important Factors in Intraregional Search (Local) Plant Location

Single Plant Establishments

Single most imp.

Very imp. Total Branch Plants Single most imp.

Very imp. Total

Markets 52 268 320 Non-union Labor 8 82 90Highways 17 257 274 Markets 25 52 77Non-union Labor 25 227 252 Land Cost 0 73 73Vacant Site 33 199 232 Wages 0 73 73Livability 20 210 230 Highways 9 60 69Wages 6 211 217 Property Tax 2 57 59Land Cost 16 190 206 Livability 4 52 56Skilled Workers 12 157 169 Water 3 48 51

Massachusetts Economic Indicators, part 1Year Total

EmployedUnem-

ployment Rate

Number of Establish.

Labor Force

Tax Rate on Commercial

Property

Assessed Value: Commercial

Property

1985 2,838,248 3.90% 131,916 3,050,403 -999 -9991986 2,902,143 3.70% 145,142 3,058,287 -999 -9991987 2,978,745 3.20% 155,623 3,086,290 -999 -9991988 3,043,585 3.20% 161,502 3,154,521 -999 -9991989 3,022,511 3.80% 164,645 3,179,780 12.19 52,070,970,9061990 2,904,687 5.60% 166,501 3,227,667 12.06 58,092,087,8901991 2,730,436 8.60% 159,153 3,161,801 12.48 59,151,214,7551992 2,714,849 8.10% 153,014 3,145,110 13.73 51,427,673,1141993 2,766,452 6.60% 157,951 3,164,174 15.15 46,783,285,4371994 2,827,332 5.80% 164,075 3,172,544 15.99 45,103,270,0351995 2,898,184 5.10% 169,047 3,164,141 16.79 44,401,264,2151996 2,957,261 4.20% 173,793 3,174,298 17.25 44,963,271,2801997 3,024,326 4.00% 169,963 3,260,263 17.69 46,302,586,223

Massachusetts Economic Indicators, part 2Year Average

Annual Wages

Welfare Cases

Schedule A Expenditures:

Education

Schedule A Expenditures

: Public Works,

Highway

Population density

1985 15,673.47 -999 -999 -999 1,1721986 16,769.65 -999 -999 -999 1,1711987 18,207.63 -999 2,774,715,529 355,481,016 1,1741988 19,529.91 -999 3,028,393,721 314,665,588 1,1761989 20,682.41 86,742 3,277,386,318 311,000,741 1,1901990 21,660.74 94,070 3,440,838,075 333,862,310 1,2041991 22,519.02 104,789 3,557,874,776 306,913,395 1,1991992 23,851.84 109,230 3,516,412,060 292,070,843 1,1981993 24,245.61 114,498 3,570,770,134 334,173,330 1,2001994 24,590.85 109,724 3,985,969,834 362,545,661 1,2021995 25,584.28 97,693 4,262,415,710 316,406,981 1,2061996 26,680.02 86,717 4,573,251,030 411,169,322 1,2091997 27,908.24 77,942 4,801,913,582 423,504,402 1,212

Two Econometric Models– (1) Eit = f(Lit, Tit, Awit, Vit, Wit, Edit, Hit, Pdit),

– (2) Fit = g(Lit, Tit, Awit, Vit, Wit, Edit, Hit, Pdit),

– Eit refers to the number of people employed in the ith city in the tth year,

– Fit refers to the number of commercial establishments in the ith city in the tth year,

– Lit refers to the labor force in the ith city in the tth year,

– Tit refers to the commercial property tax rate in the ith city in the tth year,

– AWit refers to the average annual wage in the ith city in the tth year, in thousands,

– Vit refers to the assessed value of commercial property in the ith city in the tth year, in millions

– Wit refers to the number of welfare cases in the ith city in the tth year,

– Edit refers to the education expenditure in the ith city in the tth year, in millions,

– Hit refers to the highway expenditure in the ith city in the tth year, in millions,

– Pdit refers to the population density in the ith city in the tth year.

Estimation Results Using Employment as the Dependent Variable

Independent Variable Estimated Parameter t-statistic P-value ElasticityLabor Force 1.529 89.918 0.000 1.694Property Tax Rate -46.084 -6.195 0.000 -0.083Average Wage 5.788 1.124 0.261 0.017Assessed Valuation 0.861 4.414 0.000 0.015Welfare Cases -0.522 -4.364 0.000 -0.018Highway Expenditure 471.560 8.902 0.000 0.056Education Expenditure 83.281 15.857 0.000 0.113Population Density -1.990 -26.130 0.000 -0.292Intercept -4111.000 -20.904 0.000

Estimation Results Using Establishments as the Dependent Variable

Independent Variable Estimated Parameter t-statistic P-value ElasticityLabor Force 0.055 70.160 0.000 1.050Property Tax Rate -2.028 -5.501 0.000 -0.063Average Wage 1.180 3.831 0.000 0.060Assessed Valuation -0.106 -11.744 0.000 -0.032Welfare Cases -0.003 -0.505 0.613 -0.002Highway Expenditure 28.030 11.380 0.000 0.058Education Expenditure 3.833 15.724 0.000 0.089Population Density -0.035 -10.065 0.000 -0.089Intercept -37.645 -4.004 0.000

Descriptive StatisticsVariable Mean Std. Dev. Min. Max. CasesNumber Employed 8184.6 30009 14.799 552100 3158Number of Establishments 474.91 1095.1 12.158 18990 3144Property Tax Rate 14.816 6.017 1.055 42.72 3159Assessed Valuation 142.54 573.23 16.111 12590 3145Welfare Cases 279.01 1195.8 10.906 20560 3159Education Expenditure 11.075 24.806 11.908 471.7 3159Highway Expenditure 0.979 1.707 9.893 30.45 3159Population Density 1202.3 2220.9 3.893 18530 3159Labor Force 9069.3 18454 10.883 304700 3159Average Wage 24.199 7.641 1.941 120.9 3158