Regional taxes and expenditures can affect the geographic location of both households and firms.  Increased concentration of firms increases the demand for labor and land, driving up wage rates and land rents.  Yet, increased concentration of households increases the demand for land and the supply of labor.  This drives up land rents, but reduces wage rates.  Therefore, regional fiscal policies favored by firms should be associated with higher wages and rents, while those favored by households should be associated with higher rents but lower wage rates. Using this framework, Gyourko and Tracy (1991) in examining U.S. metropolitan areas found local fiscal policies to be as important for firm and household location as were natural amenities.  This study extends the analysis of the hedonics of local fiscal policies in examining the effects of U.S. state and local fiscal policies on wage rates and land rents for nonmetropolitan counties.  For the entire sample of nonmetropolitan counties, using Decennial Census data we examine which state and local taxes and expenditures have the most distinctive factor price effects from the others.  For example, because they directly affect savings and labor-leisure decisions, income taxes are often thought to have the most negative effects on economic activity.  Likewise, education and highway expenditures are often believed to have more positive impacts because they represent investment expenditures that induce economic growth.  Expenditures for redistributive purposes are often thought to have only negative efficiency effects.  We not only analyze the results in terms of differences in total effects across policies, but also in terms of whether they have greater effects on household or firm location.
In addition, we also examine various sub-samples of nonmetropolitan counties.  First, we divide counties into those which are adjacent to metropolitan areas versus those which are non-adjacent.  We further divide these sub-samples according to population size.  Finally, we divide nonmetropolitan counties into other functional categories such as whether they are primarily agriculturally based or manufacturing based.  This provides additional insight into the debate on the economic effects of regional fiscal policies because otherwise comparable regions are being compared.  For example, examination of a sample of states is problematic because some are much more urbanized than others or have different industry compositions.
Finally, we perform sensitivity analysis to examine the robustness of the results to alternative model specifications, spatial clustering of errors, and potential endogeneity.  Accounting for clustering of errors accounts for spatial autocorrelation arising from economic processes not matching county boundaries. Regarding potential endogeneity, stagnant areas, for example, may be more likely to adopt low taxes, biasing the tax coefficients towards zero.
Our findings will be useful to policy makers in terms of knowing whether they can lower one tax while increasing another and still able to spur economic growth.  Or is it simply the overall tax burden that matters?  Likewise, the results also would provide information regarding whether certain expenditures such as on primary and secondary education and highways affect economic growth more than other expenditures such as transfer payments.