Impact of Infrastructure Investment on Tax: Estimating Spillover Effects of the Kyushu High-Speed Rail Line in Japan on Regional Tax Revenue

Abstract

This paper analyzes the impact of infrastructure investment on tax revenues and on the economy of the region. In 1991, the Kyushu high-speed rail line was constructed and was completed in 2003. In 2004, the rail line started operating from Kagoshima to Kumamoto. The entire line was opened in 2011. The effect of the Kyushu high-speed rail line (shinkansen train) on the economy has often been debated. We estimated its impact in the Kyushu region of Japan by using the difference-in-difference method, and compared the tax revenues of regions along the railway line with other regions that were not affected by the railway line. Our findings showed a positive impact on the region’s tax revenue following the connection of the Kyushu rapid train with large cities such as Hiroshima and Osaka. Tax revenue in the region significantly increased during construction in 1991–2003, and dropped after the start of operations in 2004–2010. The rapid train’s impact on the neighboring prefectures of Kyushu is positive. However, in 2004–2013, its impact on tax revenue in places farther from the rapid train was observed to be lower. When the Kyushu railway line was connected to the existing high-speed railway line of Sanyo, the situation changed. The study found statistically significant and economically growing impact on tax revenue after it was completed and connected to other large cities such as Hiroshima and Osaka. Tax revenues in the regions close to the high-speed train is higher than in adjacent regions. The difference-in-difference coefficient methods reveal that corporate tax revenue was lower than personal income tax revenue during construction. However, the difference in corporate tax revenues rose after connectivity with large cities was completed. The railway’s connectivity to large cities has a significant economic impact not only in the case of Japan but also in other cases such as Uzbekistan.