THE DEBT/TAX CHOICE IN THE FINANCING OF STATE AND LOCAL CAPITAL EXPENDITURES

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    Abstract

    ABSTRACT. State and local governments commonly finance investment in public capital by issuing bonds and by using current revenues. This paper presents a model of state and local governments' reliance on borrowing in which the optimal share of debt in the financing of capital investment depends on the relative costs of tax and debt finance. Equations are derived and estimated for spending on public capital and the share of debt in the financing of that spending. The results reveal that the level of private incomes plays an important role in both the capital investment and financial decisions of the jurisdiction. Even after controlling for Sunbelt‐Snowbelt differences in incomes, grants, outstanding debt and certain demographic factors, the results indicate that state and local governments located in the Snowbelt rely more heavily on bond issues to finance capital investment. Finally, the estimated invariance of the level of state and local capital investment to the share of debt in the financing of the investment suggests that investment decisions are not greatly affected by factors influencing the willingness to issue bonds.

    Original languageEnglish (US)
    Pages (from-to)529-547
    Number of pages19
    JournalJournal of Regional Science
    Volume34
    Issue number4
    DOIs
    StatePublished - Nov 1994

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