Abstract
This study investigates the effect of state economic development (ED) agency spending on state income and employment growth using data from the 1986-1994 period. The study finds that ED spending has a modest positive effect on the generation of state income and employment, even after controlling for the negative effect of collecting taxes to fund ED spending. It is estimated that a doubling of state ED spending (on average $71.5 million in 1992) funded by an increase in taxes would raise the yearly average employment growth rate by 0.16% (from 1.52% to 1.68%) and the yearly average per capita income growth rate by 0.22% (from 4.07% to 4.29%). The study also finds that ED spending interacts with state and local taxes, so that the negative effect of taxes on economic growth is underestimated when ED spending is omitted from the analysis.