TAX PROGRESSIVITY AND STATE ECONOMIC-PERFORMANCE

Principles of fiscal federalism suggest that subnational units of gove rnment should rely an benefits-received financing, implying regressivi ty in state and local taxes. Empirically, however stares and their loc alities vary enormously in the degree of progressivity of their tar sy stems. This article investigates the effect of tax progressivity on ec onomic growth. Using a pooled cross-section model from 1977 to 1993, t he author found that the degree of progressivity has no effect on the rate of growth of state personal income per capita. Measuring growth r ates over the entire period the author found that progressivity has a significant negative effect on economic growth. The long-period result is driven by the high growth rates of a small number of northeastern states, who benefited from strong regional growth and their tar haven status adjacent to more progressive states. The weak progressivity eff ect suggests that there is considerable scope for differences in tax i ncidence across states.