NBER WORKING PAPER SERIES FISCAL ZONING AND SALES TAXES: DO HIGHER SALES TAXES LEAD TO MORE RETAILING AND LESS MANUFACTURING?

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1 NBER WORKING PAPER SERIES FISCAL ZONING AND SALES TAXES: DO HIGHER SALES TAXES LEAD TO MORE RETAILING AND LESS MANUFACTURING? Daia Bunes David Neumak Michelle J. White Woking Pape NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambidge, MA Apil 2011 The authos ae gateful to the Public Policy Institute of Califonia and the David A. Coulte Family Foundation fo suppot fo using the NETS data fo this eseach. We also thank Tony Soelle fo assistance with AcGIS, Eve Iwin fo assistance with the Floida population data and institutional detail, Sima Kamouie and Linchun Chen fo eseach assistance, and William Stange, Geoge Zodow, anonymous eviewes, and semina paticipants at UCI, Rice/Univesity of Houston, the Ameican Law and Economics Association Confeence, and the Southen Califonia Confeence in Applied Micoeconomics. The views expessed ae not those of the Public Policy Institute of Califonia o the National Bueau of Economic Reseach. White is gateful to the Cheung Kong Gaduate School of Business, Beijing, fo hospitality and financial suppot. NBER woking papes ae ciculated fo discussion and comment puposes. They have not been peeeviewed o been subject to the eview by the NBER Boad of Diectos that accompanies official NBER publications by Daia Bunes, David Neumak, and Michelle J. White. All ights eseved. Shot sections of text, not to exceed two paagaphs, may be quoted without explicit pemission povided that full cedit, including notice, is given to the souce.

2 Fiscal Zoning and Sales Taxes: Do Highe Sales Taxes Lead to Moe Retailing and Less Manufactuing? Daia Bunes, David Neumak, and Michelle J. White NBER Woking Pape No Apil 2011, Revised Decembe 2012 JEL No. H71,J2,R52 ABSTRACT We test the hypothesis that local govenment officials in juisdictions that have highe local sales taxes ae moe likely to use fiscal zoning to attact etailing. We find that total etail employment is not significantly affected by local sales tax ates, but employment in big box and ancho stoes is significantly inceased in juisdictions whee sales tax ates incease. We also find that manufactuing employment is significantly loweed in these juisdictions. These esults suggest that local officials in juisdictions with highe sales tax ates concentate on attacting lage stoes and shopping centes and that thei effots cowd out manufactuing. A ise of one pecentage point in a county-level local sales tax ate is pedicted to esult in 258 additional etail jobs and the loss of 838 manufactuing jobs. Daia Bunes Depatment of Economics Univesity of Califonia at Ivine 3151 Social Science Plaza Ivine CA Michelle J. White Depatment of Economics Univesity of Califonia, San Diego La Jolla, CA and NBER David Neumak Depatment of Economics Univesity of Califonia at Ivine 3151 Social Science Plaza Ivine, CA and NBER

3 I. Intoduction Many U.S. states allow local govenments to levy sales taxes that add to the state sales tax and to keep some o all of the evenue (Lewis, 2001). These exta sales taxes, which have the same base as the state sales tax, give local govenment officials an incentive to encouage etailing, since etailing geneates moe sales tax evenue than othe land uses. Coespondingly, these taxes also give local govenment officials an incentive to discouage othe land uses, since they geneate less sales tax evenue and could cowd out etailing. Local govenment officials have vaious policy instuments and pactices that they can use to encouage etailing: they can zone additional land fo etail use, they can allow etail developments to have highe density levels, and they can educe the often-fomidable set of appovals and inspections that ae equied fo constuction o enovation. They can use all of these instuments and pactices in evese to discouage othe land uses. We use the tem fiscal zoning to efe to local govenment officials effots to encouage land uses that geneate high tax evenue which in this case we intepet as high sales tax evenue. In this pape, we fist develop a model of fiscal zoning that pedicts that local govenment officials ae moe likely to encouage etailing when the sales tax ate in thei juisdiction is highe. We then test this pediction empiically by examining whethe etail employment inceases in esponse to highe sales tax ates. Manufactuing may compete with lage stoes and shopping centes fo land, because both occupy lage tacts of flat land, often close to highways. In addition, manufactuing geneates less sales tax evenue than etailing, because all sales by etail stoes ae subject to sales taxes, while most sales by manufactuing fims ae exempt. 1 As a esult, local officials effots to attact etailing in ode to incease sales tax evenue may come at the cost of discouaging manufactuing an impotant policy issue since jobs in manufactuing ae often bette-paid than jobs in etailing (Leoy, 2005). Ou empiical analysis uses data fom Floida, which is a useful laboatoy fo analysis because it had a constant state sales tax ove ou sample peiod ( ), but also allowed county 1 See below fo data and futhe discussion. 1

4 govenments to levy additional sales taxes on the same base these vay consideably both cosssectionally and ove time. Because we study one state, and because we use panel data models that include yea and county fixed effects, we ae able to contol fo fixed diffeences acoss counties in local taxation and also fo changes ove time that ae common to all counties. We also take explicit account of othe local pogams that cause vaiation in local taxes, including Entepise Zones and Tax Incement Financing in edevelopment aeas (see discussion below). We have thee main findings. Fist, total etail employment is not significantly affected by vaiation in local sales tax ates. This may be because local govenment officials do not use fiscal zoning, but it altenately may occu because the positive effect of fiscal zoning on etail employment is fully offset by the dampening effect of highe sales tax ates on consume demand. 2 Second, and moe consistent with the fiscal zoning hypothesis, we find that highe local sales tax ates lead to moe employment in big box stoes and depatment stoes that ancho shopping malls. This esult suggests that local officials concentate thei fiscal zoning effots on attacting lage stoes and shopping malls and that they compete moe heavily fo these when local sales tax ates ae highe. The fiscal zoning effect on big box and ancho stoes may aise because these stoes geneate paticulaly high sales tax evenue o because they ae paticulaly sensitive to local officials effots to attact them. And thid, inceases in sales tax ates lead to lowe employment in manufactuing, suggesting that local officials effots to attact big box stoes and shopping centes cowd out manufactuing. II. Liteatue Review The hypothesis that local govenment officials use zoning to choose land uses based on the elationship between the local tax payments they geneate and the cost of poviding them with local public goods was fist poposed by Hamilton (1975) as an extension to the Tiebout Model (1956). In Hamilton s model, the main souce of local govenment evenue is the popety tax, and local govenments use zoning to pevent land uses fom being developed if they would cost the local govenment moe than they would geneate in popety tax payments. The model assumes that households 2 See Mak et al. (2000) fo an analysis of the effects of sales taxes and othe taxes on economic activity within a single metopolitan aea. 2

5 can move costlessly between juisdictions, so that households that ae excluded fom one juisdiction because they would pay less than thei cost of local public goods move to othe juisdictions and households that would pay moe in popety taxes than thei cost of local public goods choose to move to othe juisdictions. As a esult, all juisdictions ae homogeneous with espect to housing and demand fo local public goods, so that the popety tax becomes a benefit tax. White (1975) and Ohls et al. (1974) extended the model by assuming that local govenment officials use zoning to select land uses that maximize the local govenment s tax evenue net of the costs of supplying local public goods. 3 They agued that local govenment officials tend to pefe single-family houses ove apatments, because single-family houses geneate highe popety tax payments, and pefe commecial and industial land uses ove housing since housing geneates high costs fo local govenments by inceasing enollment in public schools. 4 Political scientists have also examined local officials use of zoning to encouage land uses that geneate high tax evenues, and they extended the idea to include local sales taxes as well as popety taxes. They ague that local officials use zoning to encouage etailing at the expense of othe land uses, because etailing bings in the most sales tax evenue. These studies often use Califonia as thei setting, since popety tax evenues in Califonia have fallen shaply since estictions wee imposed in the late 1970s, and local govenments thee ae allowed to adopt local sales taxes. One such study, by Lewis and Babou (1999), suveyed city manages in Califonia to detemine what types of development they favo and why. The study concluded that city manages stongly favo etailing and do so because it geneates additional sales tax evenue. But Lewis and Babou s study failed to examine whethe local officials ae moe likely to use zoning to attact etail activity when sales tax ates ae highe, no did it examine whethe officials effots wee successful. 5,6 3 See Mieszkowski and Zodow (1989), Fischel (1992, 2001), and Zodow (2001) fo discussion of the Tiebout model with zoning, the conditions fo the popety tax to be a benefit tax, and othe appoaches to the incidence of the popety tax. A ecent pape that uses the concept of fiscal zoning to model the behavio of local govenments in China is Godon and Li (2012). 4 Howeve, commecial and industial land uses may be undesiable if they geneate high pollution o congestion. 5 Political scientists tend to ignoe the issue of whethe diffeent types of development geneate diffeent costs of supplying local public goods. Fo othe discussions by political scientists of fiscal zoning and competition fo 3

6 III. Theoetical Model In this section, we develop a theoetical model of fiscal zoning unde sales taxes and deive testable implications. Assume that local govenment officials use thei zoning powe to detemine the types of development that occu within thei juisdictions. They do so by assigning tacts of vacant land to zoning categoies that include etailing, manufactuing, office buildings, housing, and othes. Although local officials have multiple tools at thei disposal fo contolling development, in the model we focus exclusively on zoning. Suppose Z denotes the numbe of aces of vacant land zoned fo etail use in juisdiction j and Z m denotes the numbe of aces of vacant land zoned fo manufactuing use in juisdiction j. When local officials in juisdiction j zone additional land fo etail use, they may compensate by zoning less land fo manufactuing use, less land fo any othe use, o they may leave less land vacant in the juisdiction. Similaly, when they zone additional land fo manufactuing, they may zone less land fo etail use, less land fo any othe use, o leave less land vacant. This means that the elationship between the amount of land zoned fo etailing vesus manufactuing can ange fom complete substitution to no substitution, o 1 Z / Z m 0. At the extemes, if Z / Z m = 1, then zoning one moe ace of land fo etail use implies zoning one less ace of land fo manufactuing use and, if Z / Z m = 0, then zoning one moe ace fo etail use has no effect on the numbe of aces zoned fo manufactuing use. 7,8 etailing, see Misczynski (1986), Fulton (1998), and Schag (1998). 6 Anothe pape elated to ous is Wassme (2002). Wassme egesses the amount of etailing in U.S. metopolitan aea sububs on sales tax and popety tax collections, using data fo 55 U.S. metopolitan aeas. He finds a positive elationship between sububan etail sales and sales tax collections, but no elationship between etail sales and popety tax collections; he agues that this povides evidence of fiscalization of land use. A poblem with Wassme s study is that it ignoes the upwad bias in the elationship between etail sales and sales tax collections that esults fom the mechanical elationship between them. 7 Fo Z / Z m to take values geate than 1 but less than 0, it must be the case that the total amount of land developed fo etail plus manufactuing use is less than the total amount of vacant land in the juisdiction. In theoy, Z / Z m could also take values geate than 0 o moe negative than 1, but we ignoe these possibilities. 8 We also assume that all land zoned fo etail o manufactuing use is developed quickly fo that use, so that zoning is a binding constaint on the amount of etail and manufactuing development. In actuality, local officials might zone moe land fo paticula uses than developes wish to build on, so that zoning is not a binding constaint. In that case, highe sales tax ates would pobably have a negative effect on the level of etail sales, since etailes would tend to choose juisdictions with low sales tax ates. Given that we find evidence of a positive athe than a negative elationship fo cetain types of etail stoes, ou esults cannot be explained by the lack of a binding zoning constaint on etail development. We also ignoe ezoning of aleady developed land. When developed land is ezoned, it is allowed to emain in the old use ( gandfatheed ), subject to some limitations. See Fischel (2001) and 4

7 The value of land zoned fo etail use and manufactuing use in juisdiction j is denoted V and V m pe ace, espectively. V depends negatively on the total amount of land zoned fo etail use in juisdiction j, Z, and may also depend negatively on the local sales and popety tax ates in juisdiction j, denoted σ and π. 9 Also, because sites in neighboing counties ae substitutes fo sites in juisdiction j, V depends positively on the sales tax ate in neighboing juisdictions, denoted τ. 10 Similaly, V m may depend negatively on the total amount of land zoned fo manufactuing Z m and on the popety tax ate in juisdiction j, π. The value of etail sales pe ace in juisdiction j is denoted S, whee S could depend eithe positively o negatively on the amount of land zoned fo etailing Z. The elationship between S and Z is likely to be negative because additional stoes compete with each othe fo sales, but could be positive if additional stoes incease shopping agglomeation economies possibly by inceasing vaiety. Because taxes ae passed on to consumes in pat as etail pice inceases, S also depends negatively on the sales and popety tax ates in juisdiction j, σ and π, and positively on the sales tax ate in neighboing juisdictions, τ. S may also have a andom component to eflect the fact that stoes and shopping centes may be successful o unsuccessful. The cost of poviding local public goods to new etail o manufactuing uses is assumed to be G pe ace. 11 Local officials ae assumed to choose how much land to zone fo etail and manufactuing use so as to maximize the net tax evenues (NTR) geneated by new development. They ae assumed to teat local tax ates as fixed, because ates ae chosen by votes in a efeendum o by the local legislatue. NTR is given by: Zodow (2001) fo discussion of whethe zoning is binding, and futhe efeences. 9 If local taxes ae benefit taxes fo etailing fims, then the evenue geneated by an incease in the sales tax and/o popety tax ate on etail fims would be fully offset by inceases in spending on local public goods that benefit etailes. In this case, thee would be no elationship between the sales and/o popety tax ates and the value of land zoned fo etailing. See Zodow (2001) fo discussion of conditions unde which local taxes become benefit taxes and no capitalization of local taxes occus. But this question has been not been investigated fo models in which thee ae multiple land uses o multiple tax souces. 10 We simplify by assuming thee is only one neighboing tax ate. 11 Fo lack of evidence to the contay, we assume that this cost is the same fo etailing and manufactuing. A planning manual fo local officials on how to assess the fiscal impact of development (Buchell et al., 1985) does not distinguish between the fiscal impact of new manufactuing vesus commecial development, suggesting little diffeence in the cost of poviding local public goods to them. Local public goods povided to non-esidential uses include sevices such as police and fie o infastuctue o both. 5

8 NTR S( Z,,, ) Z V ( Z,,, ) Z Vm ( Zm, ) Zm G( Z Zm). (1) The fist and second tems in (1) ae local sales tax and popety tax evenues fom newlydeveloped etail stoes, while the thid tem is popety tax evenues fom newly-developed manufactuing fims. 12 The fouth tem is the cost of supplying local public goods to newly-developed etail stoes and manufactuing fims. 13 Local govenment officials choose Z and Z m so as to maximize NTR. 14 Assuming an inteio maximum, the fist-ode condition detemining the amount of land zoned fo etailing Z is: Z m Z m S[ S, Z 1] V[ V, Z 1] Vm[ V, Z 1] G[1 ] m m Z Z 0. (2) The fist tem in (2) is the incease in local sales tax evenue that occus when juisdiction j zones moe land fo etailing and theefoe inceases the numbe of stoes in juisdiction j. This tem will be positive as long as the elasticity of etail sales pe ace with espect to the amount of land zoned fo etailing, S,Z, exceeds 1 (that is, as long as sales pe ace do not decline too shaply in esponse to zoning moe land fo etail use). The second tem is the change in popety tax evenues fom zoning moe land fo etailing. This tem is positive as long as the elasticity of the value of etail land pe ace with espect to the amount of land zoned fo etailing, V, Z, exceeds 1 (that is, as long as the value of 12 See Section V below fo discussion of ou assumption that manufactuing fims pay little o no sales tax. 13 We also woked though an altenate vesion of the model which assumes that local govenments maximize a utilitaian social welfae function athe than net tax evenue. We defined social welfae ove the population of existing esidents and assumed that any new development would be non-esidential (which means that the population of esidents whose pefeences must be consideed emains constant). New development is assumed to geneate enough evenue to pay fo the maginal cost of local public goods povided to the development plus a suplus used to povide additional local public goods to esidents (e.g., a new pak). As in the cuent model, we assumed that land zoned fo etailing and manufactuing may eithe be substitutes o unelated. The esults ae simila in the sense that all the tems in ou model also show up in exactly the same way in the social welfae model. But the social welfae model contains additional tems that captue the negative diect effect on esidents utility of having additional land devoted to etailing o manufactuing (i.e., moe pollution o congestion) and the positive indiect effect of having additional local public goods. How these exta tems affect the amount of land zoned fo etail o manufactuing use is ambiguous. Since the social welfae vesion of the model is moe complicated and does not change the implications fo ou main analyses, we use the simple net tax evenuemaximizing model. 14 We ignoe stategic inteactions between local govenments, and teat policy in othe juisdictions as captued in τ; we defined τ to be the neighboing juisdiction s sales tax ate, but we could also intoduce the popety tax ate in neighboing juisdictions without changing the esults. Although officials may cae about net tax evenues pe capita, we teat population as fixed athe than modeling population esponses to policy changes. 6

9 etail land does not decline too shaply when moe land is zoned fo etail use). The thid tem is the indiect effect of zoning moe land fo etail use on popety tax evenues fom manufactuing. This tem is negative as long as land zoned fo etail vesus manufactuing use ae substitutes ( Z m / Z is negative) and the elasticity of the value of manufactuing land pe ace with espect to the amount of land zoned fo manufactuing,, is geate than 1 (that is, as long as the value of land zoned fo manufactuing does not incease too shaply when less land is zoned fo manufactuing use). Finally, the last tem measues the diect and indiect effect of zoning moe land fo etail use on the cost of supplying local public goods to etailing and manufactuing uses. The diect effect must be negative since costs ise when moe land is zoned fo etail use; while the indiect effect will be positive as long as land zoned fo etail use is a substitute fo land zoned fo manufactuing use, but it is likely to be small. Similaly, the fist-ode condition fo the amount of land fo zoned fo manufactuing is: Z Z Z S[ S, Z 1] V[ V, Z 1] Vm[ V, Z 1] G[ 1] m m Z Z Z m m m 0. (3) Each tem in equation (3) has the same intepetation as the analogous tem in (2), except that diect effects in one expession become indiect effects in the othe. As long as Z / Z m is negative, all of the tems in (3) have the opposite signs of the analogous tems in (2). In paticula, the fist tem is negative, so that moe land zoned fo manufactuing educes sales tax evenue. Now conside how an incease in the local sales tax ate affects juisdiction j s gain fom zoning additional land fo etailing vesus manufactuing, which is cental to the question we study. The incease in net tax evenue fom zoning additional land fo etailing when the sales tax ate ises is: 2 NTR V S[ 1 S, Z ] [1, ] [1 S V, Z Z ]. (4) whee, fo simplicity, we have assumed that the elasticity tems in (2) ae constants, and that V m and Z / Z m do not change with changes in σ. V, m Z m The fist tem in (4) is the effect of the ise in the sales tax ate on sales tax evenues. It must be 7

10 positive as long as > 1 and > 1. These inequalities equie that sales pe ace not decline so S,Z S, pecipitously with inceased zoning fo etail use that total etail sales in juisdiction j would fall, and that sales pe ace not decline so pecipitously with a highe sales tax ate that total etail sales in juisdiction j would fall. The fact that juisdictions zone any land fo etail use and that they impose local sales taxes suggest that these two elasticity conditions ae satisfied. 15 The second tem in equation (4) is the effect of the ise in the sales tax ate on popety taxes collected on land zoned fo etailing. V / σ will be negative, except in the exteme case when local sales tax evenues ae used entiely to fund local public goods fo etail fims (when it equals zeo). The elasticity tem that multiplies it captues the additional effect on popety tax evenues that comes about because additional land zoned fo etail use educes the value of etail land pe ace. This tem is negative as long as V, Z > 1, which means that the value of etail land does not decline so pecipitously as moe land is zoned fo etailing that total popety tax evenue fom etail land use in juisdiction j falls. 16 But the second tem is multiplied by the popety tax ate which in Floida is aound 2% so that it is small. 17 Thus, equation (4) implies that the etun to zoning moe land fo etail use inceases with the sales tax ate, except in the anomalous case whee zoning moe land fo etail use geneates losses in popety tax evenue that moe than offset the gains fom additional sales tax evenue. Equation (4) being positive does not diectly imply that the amount of land zoned fo etailing inceases in esponse to a highe sales tax ate, but athe just shows how the effect of zoning moe land fo etailing on NTR vaies with the local sales tax ate. To get a moe specific pediction of how the 15 Thee ae of couse othe factos that can influence the gain fom zoning additional land fo etail at a given sales tax ate, such as the size and income of the population in the neighboing juisdiction, commuting pattens, taffic congestion levels, the level of etail vaiety in both own and neighboing juisdictions, and negative o positive extenalities. These should dop out of equation (4) because they do not change when a given juisdiction s sales tax ate changes. Howeve in the econometic analysis, the implication could be that the effects of changes in sales tax ates ae heteogeneous. In ou empiical wok, we incopoate some vaiables that could be elated to heteogeneity, such as population density and sales tax ates of coss-bode juisdictions. 16 Note that the second tem in equation (4) becomes positive if < 1. If we think of the second tem in (4) as the patial with espect to Z of NTR/ σ, then this means that the value of etail land falls shaply as Z inceases, implying that the popety tax penalty fom aising the sales tax ate becomes smalle. 17 V / σ is likely to be a multiple such as 10 to 20 times S/ σ, because the value of etail land equals the net pesent value of futue sales. But V / σ is multiplied by the small popety tax ate. 8 V, Z

11 amount of land zoned fo etailing is elated to the sales tax ate, we totally diffeentiate equation (2) with espect to σ and Z, which yields: dz / d ds [ S dz, Z S [ S, 1][ S, Z dv 1] [ V dz dv 1] [ V d, Z dv 1] dz m m, Z dz dz 1] m 2 [ V m, Z m. (5) 1] The numeato is the same as equation (4). The denominato epesents the additional effect of changing Z when taking the total diffeential. We just agued that the numeato is positive. Unde the same types of assumptions as made ealie that all of the elasticity tems ae geate than 1, each tem in the denominato must be negative, since S and V wee assumed to be negatively elated to Z, and V m was assumed to be negatively elated to Z m. Thus, coupled with the negative sign outside the backets, the entie expession is positive. Oveall, then, juisdiction j gains fom zoning additional land fo etailing when the local sales tax ate ises, as long as etail sales pe ace do not fall too quickly as zoning fo etail use inceases, and sales and land values do not fall too quickly as the local sales tax ate inceases. Although we do not distinguish in ou model between small etail stoes vesus big-box o ancho stoes, this point may povide a eason why local juisdictions espond to highe sales tax ates by zoning moe land fo big box o ancho stoe development. Compaed to small stoes, these developments ae likely to geneate highe sales pe ace and/o shopping agglomeation economies that benefit small stoes in juisdiction j. The highe values of S aises the value of Z / σ fo big box o ancho stoes compaed to small stoes. 18 We can also solve fo the effect on net tax evenues fom zoning additional land fo manufactuing when the local sales tax ate ises. The esult (not shown) is the same as equation (4), multiplied by Z / Z m. Assuming that Z / Z m is negative, this effect must be negative as long as (4) is positive. Thus, when the local sales tax ate ises, juisdiction j has an incentive to zone moe land fo etail use and less land fo manufactuing use. O, moe pecisely, if juisdiction j has an incentive to zone 18 The value of (5) will also tend to be highe if the juisdiction s stoes have geate etail vaiety o less competition fom stoes in neighboing juisdictions, because sales pe ace ae highe and/o because sales ae less elastic with espect to the sales tax ate. 9

12 moe land fo etail use, then it also has an incentive to zone less land fo manufactuing use. Futhe, suppose we assume that thee is a stonge tadeoff between land used fo lage etail developments and manufactuing than between land used fo small etail stoes and manufactuing, because lage etail developments and manufactuing fims tend to demand the same kinds of land. Then highe sales tax ates ae likely to have a lage negative effect on the amount of land zoned fo manufactuing because they make it moe pofitable fo local officials to zone fo big box stoes and shopping centes. Now tun to the question of how local sales tax ates affect employment in etailing in juisdiction j (because we have data on employment, athe than land use o zoning). To analyze this question, we must shift fom analyzing the behavio of local officials to analyzing the behavio of etail stoe ownes. To keep the analysis simple, we teat all etail stoes in juisdiction j as though they wee a single stoe occupying all of the land zoned fo etailing in juisdiction j. Retail pofits ae then: 1 Q (1 ) ( Z, L, ) wl ( ) Z V ( Z,,, ). (6) Hee Q denotes evenue fom etail sales including sales taxes, which depends positively on inputs of land zoned fo etailing Z, and labo in etailing L. Q is also assumed to depend on the sales tax ate, since etailes may pass on sales tax inceases by aising pices. We make the usual convexity assumptions fo the etail poduction function, i.e., Q 0 andq 0, and we assume that the maginal evenue poduct of labo falls when the local sales tax ate ises, i.e., 0. The second tem in (6) is the cost of labo, whee the wage ate is denoted w, and thid tem in (6) is the ental cost of land pe ace pe yea, ( + π)v, whee is the inteest ate. Retail stoe ownes hie labo until the maginal evenue poduct of labo equals the wage ate, o 1 Q L w. (7) (1 ) LL To conside how etail stoe ownes change the level of etail employment when juisdiction j s sales tax ate ises, we totally diffeentiate (7) and solve fo dl /dσ. The wage ate w is assumed to be fixed on the assumption that it is set in a lage maket. The esult is: LZ QL 10

13 dl QL QL QLZ ( dz / d ). (8) d (1 ) Q Q Q LL LL LL This equation has thee tems. The fist tem captues the negative effect on etail employment fom loss of evenue due to the ise in the sales tax ate, which must be negative. The second tem captues the effect of the highe sales tax ate on the maginal evenue poduct of labo, which is also QL negative since 0, but is likely to be small. The thid tem captues the effect of the sales tax change though zoning. When the sales tax ate is highe, local officials zone moe land fo etailing (dz /dσ > 0), which causes the cost of etail land to fall and the land-to-labo atio in etailing to ise. Retail employment theefoe ises because the maginal evenue poduct of labo is highe ( Q 0). The thid tem theefoe is positive and offsets the negative fist and second tems, so that fiscal zoning eithe makes the etail employment-sales tax elationship less negative o changes its sign fom negative to positive. We test fo this in ou empiical wok. Finally, if the fiscal zoning esponse to an incease in the local sales tax ate is stonge fo big box and ancho stoes, then dz /dσ in equation (8) will be moe positive fo these stoes, and we will be moe likely to find a positive employment esponse to highe sales tax ates when we examine lage stoe employment. We can similaly model manufactuing employment using a single manufactuing fim that is assumed to occupy all of the land zoned fo manufactuing in juisdiction j. Manufactuing pofits ae then: m Q ( Z, L ) wl ( ) Z V ( Z, ). (9) m m m m m m In equation (9), Q m denotes manufactuing evenue, which depends on inputs of land Z m and labo m LL L m. We also assume the convexity conditions Q 0 and Q 0. We follow the same pocedue as above to deive dl m /dσ, using the indiect elationships between land zoned fo manufactuing, land zoned fo etailing, and the local sales tax ate. The esult is: m LZ LZ 11

14 m dzm dz QLZ dlm dz d. (10) m d Q LL This condition is analogous to the thid tem in (8) multiplied by Z m / Z. Thus the local sales tax ate affects manufactuing employment only though its effect on the amount of land zoned fo etailing and manufactuing use. If thee is no substitutability between the amount of land zoned fo manufactuing vesus etailing ( Z m / Z = 0), then (10) equals zeo and manufactuing employment is pedicted to be unelated to the sales tax ate. But if thee is some substitutability ( Z m / Z < 0), then local officials espond to an incease in the sales tax ate by zoning moe land fo etailing and less land fo manufactuing. As a esult, the cost of manufactuing land ises, so that the labo-to-land atio in manufactuing ises and the maginal poduct of labo falls. Thus ownes of manufactuing fims ae pedicted to educe the numbe of manufactuing jobs. We also test this pediction in ou empiical wok. IV. Institutional Envionment fo Local Sales Taxes in Floida We use Floida data fom fo ou study. Floida has a state sales tax, which duing ou sample peiod was always 6%. Counties in Floida can also adopt local sales taxes that ae added to the state sales tax; they ae adopted o changed eithe by county votes in a efeendum o by adoption of a county odinance (The Floida Legislatue s Office of Economic and Demogaphic Reseach, 2011). Although in the aggegate, popety taxes ae a moe impotant souce of evenue fo Floida local govenments than ae local sales taxes, the latte ae gowing much moe apidly. Afte coecting fo inflation, local sales tax evenue in Floida inceased nealy thee times as fast as popety tax evenue between 1992 and 2008, ising fom 1.9% of local govenment tax evenue to 3.8% (U.S. Census Bueau Census of Govenments, 1992 and 2007). Moeove, local sales taxes ae an impotant shae of the taxes that etail stoes pay to local govenments. Using data fo payments of sales tax and popety tax by the commecial secto in Floida, we estimate that duing ou study peiod commecial popeties paid 56% as much in local sales taxes as they paid in popety taxes and the figue would be highe if we could sepaate etail stoes fom othe commecial popeties. Oveall, these figues suggest that Floida is 12

15 a good test case fo studying the effects of inceased eliance by local govenments on sales taxes. 19 Local sales taxes consist of seven sepaate taxes. All ae levied at the county level, apply unifomly acoss the county, and have the same tax base as the Floida state sales tax. The oveall local sales tax ate in a county is capped at 1.5%. Tax evenues fom two of these taxes the infastuctue tax and the small county sutax go diectly to local govenments (which in Floida ae called municipalities). 20 These two taxes ae the most commonly-used local sales taxes in Floida and they account fo most of the evenues. Duing ou sample peiod, an aveage of 44 out of 67 Floida counties imposed one o both of these taxes and the aveage sales tax ate fo the two taxes in counties using them was 0.96%. Revenues fom these two taxes ae shaed among municipalities eithe based on thei shaes of county population o on whee the sales occued. Fo evenues to be distibuted accoding to whee sales occued, the county must adopt an intelocal ageement. 21 Duing ou sample peiod, aound 35% of counties that used these two taxes had intelocal ageements (Floida Legislative Committee on Integovenmental Relations, 2003). The othe five local sales taxes ae levied by counties but go to county-level special-pupose authoities, such as school boads, and health, welfae o tanspotation authoities. Duing ou sample peiod, an aveage of only eight school boads, two health o welfae authoities, and one tanspotation authoity levied local sales taxes. The aveage local sales tax ate fo these taxes in counties that levied them was 0.48% duing ou sample peiod. See Table 1A fo infomation on local sales tax ates by type of tax Sales tax and popety tax payments by the commecial popety secto in Floida wee $6,393,000,000 and $1,193,000,000, espectively, in (We wee unable to obtain these figues fo ealie yeas.) The figue fo sales tax payments includes both state and local sales taxes. Using aveage figues fo ou sample peiod, the aveage total sales tax ate was 6.7%, of which the local sales tax ate was 0.7%. Thus the atio of local to total sales tax payments was 10.4%. (See Table 3.) This implies that the atio of local sales tax payments to popety tax payments by the commecial popety secto is appoximately.104 (5.4) =.56. This infomation comes fom Floida Depatment of Revenue, (viewed Novembe 4, 2012) and (viewed Octobe 7, 2012). 20 The small county sutax can be used only by counties with populations less than 50, Although county-specific intelocal ageements can be poposed by eithe the county o municipal govenments, the govening bodies epesenting the majoity of the espective county s municipal population must ultimately appove the ageements. 22 School boads in Floida diffe fom othe county-level authoities because they have independent authoity to levy local sales taxes; othe authoities local sales taxes must be levied by the county. The school boad tax is the 13

16 Fomally, land-use policy in Floida is set at the municipal level, while local sales tax policy is set at the county level. One issue is that officials in most Floida municipalities might appea to have little incentive to engage in fiscal zoning, because the sales tax evenue that additional etailing would geneate eithe goes to county-level authoities o is shaed among municipalities within a county accoding to elative population. Howeve counties that adopt local sales taxes clealy have an inteest in attacting etailing and county officials have vaious ways of encouaging municipal officials to adopt zoning policies that favo etailing. One method is fo the county to adopt an intelocal ageement that distibutes evenues fom the local sales tax to municipalities based on whee etail sales occu. Anothe method is fo the county to diectly ewad municipalities that engage in fiscal zoning by giving them additional infastuctue. A thid method is fo county officials to engage in fiscal zoning diectly by encouaging etail development in unincopoated aeas; in these aeas, counties athe than municipalities ae esponsible fo zoning. 23 In ou empiical wok, we ignoe the county-municipality distinction and teat counties as though they both decide the local sales tax ate and detemine zoning policy. We theefoe examine the fiscal zoning hypothesis using county-level data as ou unit of analysis. This potentially aises endogeneity concens, since sales tax ates could be set in esponse to changes in etailing o manufactuing activity. We examine this issue futhe in Section VI. Finally, an impotant advantage of using Floida data is that counties adopted local sales taxes o changed thei ates faily fequently duing ou study peiod. As of 1992, nealy half of Floida counties had no local sales taxes; by 2006, this figue had dopped to 13%. Also, between 1992 and 2006, thee wee 75 changes in aggegate local sales tax ates and 32 instances of counties imposing a local sales tax whee thee was none befoe. School Capital Outlay Tax, the tanspotation tax is the Chate County Tansit System Tax, and the health/welfae authoity taxes ae the Indigent Cae and Tauma Cente Tax (Dade County only), the County Public Hospital Tax (Dade County only), and the Indigent Cae Tax. In addition, thee ae seveal othe local sales taxes that we exclude fom ou study, including a touist development tax, a convention cente tax, and a pofessional spots facility tax. These ae excluded because they ae imposed on hotels/motels and theefoe do not ceate incentives fo local govenments to expand etail activity. See Floida Legislative Committee on Integovenmental Relations (2009 and ealie yeas). 23 Municipalities may nonetheless benefit by subsequently annexing the newly-developed land along with neaby aeas (e.g., King, 2010; Shoe Roth, 2010). 14

17 Tables 1B and 2 give a histoy of local sales tax ate changes by county ove this peiod. Given that ou empiical appoach is based on a diffeence-in-diffeences analysis elating changes in employment to changes in county tax ates, this extensive within-county vaiation in sales taxes is essential to identifying the effects of sales taxes. Aggegating acoss all of the changes in Table 2, thee ae 56 sales tax inceases and 19 deceases. The table also shows a elatively consistent patten of inceases thoughout the sample peiod, athe than any kind of cyclical patten that could potentially confound ou estimation of the effects of sales tax ates. 24 V. Data and Appoach We use panel data fom the National Establishment Time Seies (NETS) on the univese of individual business establishments in Floida fom 1992 to Fo each establishment, we know employment each yea and the establishment s name, industy, and location. 25 We aggegate these data to get total employment in etailing and manufactuing by county fo each of the 67 Floida counties fo each yea fom 1992 to The NETS data ae not the only souce of county-level employment infomation. The County Business Pattens data, closely elated to the Quately Census of Employment and Wages, also povide such infomation. Howeve, the data ae often suppessed o epoted as anges fo confidentiality easons. Moeove, much of ou inteest focuses on big box and ancho etail stoes, which can be identified by name in the NETS data. This is not possible in the County Business Patten data, because company names ae not included and thee ae no sub-categoies within the etail secto. We theefoe use the NETS data fo ou analysis. Ou basic model estimates how changes in local sales tax ates affect etail employment. As discussed in connection with equation (8) above, the pedicted sign of this elationship is ambiguous: fiscal zoning can make it positive, but it will be negative if thee is no zoning esponse to a ise in the 24 Nonetheless, ou models include fixed effects which contol fo aggegate cyclical effects. But because economic conditions acoss counties can divege, we also estimated ou models including a contol fo county-level unemployment ates the esults wee vitually identical to those epoted below. 25 A detailed discussion of the NETS data along with assessment of its quality is povided in Kolko and Neumak (2007) and Neumak et al. (2007). 15

18 sales tax ate. Anothe facto not discussed in the model is that competition acoss counties to attact etailing may be a zeo-sum game, since one county s success may come at the expense of neaby counties if the aea can only suppot a limited numbe of stoes. To the extent that counties compete with each othe fo etailing in esponse to sales taxes, the estimated elationship will tend to be weake. Finally, if fiscal zoning has little oveall effect on land use (because most land zoned fo etailing emains vacant), then the estimated elationship will tend to be small/insignificant. Given all these consideations, finding a positive elationship between changes in local sales tax ates and the level of etail activity would clealy povide evidence of fiscal zoning. 26 Anothe question is whethe the level of etail employment is well suited to measuing the stength of fiscal zoning. A moe diect measue would be the amount of land zoned fo etail use. But land zoned fo etailing is an impefect measue of the level of etail activity, both because stoes may be vacant and because some land zoned fo etailing may be vacant. Vacancies of both types may esult if local govenment officials zone too much land fo etailing (contay to the assumptions of ou model). In addition, as noted in Section I, local govenment officials can also encouage etailing by allowing land zoned fo etailing to be developed at highe density levels o by expediting pemit and inspection pocedues. Using etail employment as ou measue of the effect of fiscal zoning has the advantage that it encompasses all thee policies and that it measues etail activity only fo stoes that ae actually in opeation. Because lage etail concentations ae paticulaly valuable in aeas with highe local sales tax ates, we also examine the effect of fiscal zoning on etail employment in big box stoes, such as Wal- Mat, Home Depot, and Costco, and depatment stoes of the type that ancho lage shopping malls, such as Macy s. Ou hypothesis is that local govenment officials in juisdictions that have high local sales taxes ae paticulaly likely to compete fo these stoes and the associated shopping malls An additional facto is that the pice elasticity of demand fo goods bought fom bick-and-mota stoes has been inceasing ove time as sales migate to the intenet. See Goolsbee and Zitan (1999). 27 The stoes in ou big box/ancho categoy ae: Best Buy, Big Lots, Bloomingdales Inc., Cicuit City, Costco, Fedeated Retail Holdings (Lod & Taylo), Home Depot, J.C. Penney, K-Mat, Lowes Home Centes, Macy s, May Depatment Stoes, Montgomey Wad, Neiman Macus Goup Inc., Nodstom Inc., Office Depot, Office Max, 16

19 We also estimate simila models fo manufactuing employment. 28 As discussed in connection with equation (10) above, county-level manufactuing employment is pedicted to fall in esponse to highe local sales tax ates if local officials engage in fiscal zoning. This is because local govenment officials zone less land fo manufactuing and moe fo etailing when the sales tax ate is highe, causing manufactuing to be cowded out by etailing. In contast, if thee is no fiscal zoning then ou pediction is that thee will be no elationship between manufactuing employment and local sales tax ates. Table 3, Panel A, gives summay statistics fo ou county-level sample. All sales tax ates ae the sum of the state sales tax ate of 6% and local sales tax ates. The neighboing sales tax ates in the county-level sample ae a weighted aveage of the sales tax ates in all bodeing counties, using the lengths of the bodes with each neighboing county as weights. 29 Sales tax ates in Floida anged fom 6.0% to 7.5% duing ou sample peiod, while sales tax ates in the neighboing counties in Alabama and Geogia (which also use local sales taxes) anged fom 5.0% to 7.0%. 30 The table also shows that industy employment shaes vay widely acoss aeas. Fo example, in the county-level sample, the shae of employment in etail anges fom 4.17% to 29.30%, and the shae of employment in manufactuing anges fom 1.55% to 47.29%. Employment levels also vay geatly fo example, fom nea zeo to 241,000 jobs in etailing and fom nea zeo to 112,000 jobs in manufactuing at the county level. Finally, as we descibe in moe detail in Section VII, we also examine a sepaate sample in which Saks & Company, Seas Roebuck, Staples, Taget Copoation, and Wal-Mat. The list of big box etailes is taken fom Mazzolai and Neumak (2012) and we added additional stoes identified as those that ancho malls in Floida, fom Oyston (2007). 28 Ou model simplified by assuming that manufactues do not pay any local sales tax; but in fact manufactues in Floida ae equied to pay sales tax on sales to contactos, but not on sales to eselles (the latte esell the poduct in the same fom o afte futhe pocessing). Figues given above in footnote 19 imply that the atio of local sales tax payments to popety tax payments fo the etail/commecial popety secto in Floida is 56%. If we follow the same pocedue fo the manufactuing secto, we find that atio of local sales tax payments to popety tax payments fo manufactue/industial popety in Floida is only 12%. The moe than fou-fold diffeence in local sales tax payments acoss the two sectos justifies the fact that we ignoe sales tax payments by manufactues. Additional evidence suggesting that sales tax payments by manufactuing fims ae low comes fom Hawkins and Muay (2004), who un a egession explaining sales tax collections as a function of manufactuing employment and othe vaiables, using data fo six states including Floida. They find that sales tax collections have little elationship to the level of manufactuing employment. Ring (1999) and Taege and Williams (1997) both calculate the faction of geneal sales tax evenue paid by Floida businesses vesus consumes, but they do not distinguish between etail vesus manufactuing fims. 29 To account fo coastline and not oveweight land bodes, we include coastline as pat of the bode, using the county s own tax ate as the tax ate on this bode. 30 Data ae fom Geogia Depatment of Revenue (2011) and Alabama Depatment of Revenue (n.d.). 17

20 counties ae divided into bode vesus inteio egions. The statistics fo these bode and inteio egions ae epoted in Table 3, Panel B. Because these egions ae subdivisions of counties, the sales tax ates ae the same, but employment levels ae lowe. VI. County-level Specifications and Results Empiical Appoach Ou base case model, fo the analysis of the effects of sales tax ates on county-level etail employment, is the following: ln RE ct = α + β 1 tax ct + β 2 tax c,t 1 + γ 1 neighbotax ct + γ 2 neighbotax c,t 1 + D c δ + D t λ + D c tθ + ε ct. (11) In equation (11), RE ct is etail employment in county c in yea t. The vaiables tax ct and tax c,t 1 ae the state plus local sales tax ates in county c in the cuent yea and the pevious yea, espectively, while neighbotax ct and neighbotax c,t 1 ae the weighted aveages of the same sales tax ates in county c s neighboing counties (including counties acoss state bodes) in the cuent yea and the pevious yea, espectively. D c and D t ae county and yea fixed effects, and D c t is a set of county-specific linea time tends. The coefficients of inteest ae β 1 and β 2 and thei sum, o the pecentage change in etail employment when the sales tax ate in the cuent yea and/o the pevious yea ises by one pecentage point, holding neighboing counties sales tax ates fixed. Note that because the Floida geneal sales tax ate was 6% thoughout ou sample peiod, all changes in sales tax ates ae due to changes in local sales tax ates. Theefoe, what we identify is the effect of vaiation in local sales tax ates only, and identification comes fom changes in individual counties sales tax ates ove time. This egession captues the key equations fom ou theoetical model equations (5) and (8). Equation (5) implies that a juisdiction is likely to zone additional land fo etailing when the sales tax ate ises. Equation (8) implies that etail employment will be negatively elated to the sales tax ate in the absence of fiscal zoning, but can become positively elated to the sales tax ate if zoning is sufficiently stong. The county fixed effects in equation (11) contol fo time-invaiant diffeences between counties 18

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