The Effects of Local Government Expenditure and Property Taxes on Investment*

The effect of local government property taxes and expenditures on investment in housing and manufacturing plant and equipment is analyzed in theoretic model and tested empirically. An investment model of firm behavior is developed and implications regarding the effects are deduced. These implications are tested in a single equation model of investment in single- and multifamily structures and capital investment in manufacturing in eleven urban cities and their eighty-nine suburbs. Tentative conclusions that additional municipal expenditures increase investment and a higher effective property tax rate diminishes it are supported and that cities have on average exhausted the net benefits of increasing balanced budgets.