Federico Revelli

In search of yardstick competition: a spatial analysis of Italian municipality property tax setting

This paper uses Italian local government data to test for fiscal interaction arising from yardstick competition. To discriminate yardstick competition from competing theories of strategic interaction, we account for the incentives and constraints generated by the electoral system, in particular for the presence of term limits and the size of the majorities supporting the mayors. Estimation of a local property tax setting equation uncovers positive spatial auto-correlation in local tax rates of jurisdictions where the mayors run for re-election in uncertain contests, while interaction is absent where either mayors face a term limit or are backed by large majorities.

Reaction or interaction? Spatial process identification in multi-tiered government structures

This paper models horizontal and vertical fiscal externalities in a multi-tiered structure of government, and implements maximum likelihood (ML) and instrumental variables (IV) estimation techniques to identify the source of spatial dependence in English local government expenditures. The results show that upper tier (County) autority expenditure has two opposite effects on lower tier (District) authority spending decision. By raising the local property tax Burden, Countries reduce resources available to Districts and lower the demand for Discrict services by estimated elasticity of -0.45. On the other hand, Country services are estimated to be complements of District services, with an elasticity of 0.25. Moreover, when vertical fiscal externalities are explicity taken into account, the estimated magnitude of horizontal fiscal interactions is substantially reduced. The observed positive spatial auto-correlation among Districts can consequently be attributed to a large extent to common reaction to Country fiscal policies, rather than to actual strategic interaction.

Tax Mix Corners and Other Kinks

This paper models the local tax mix determination process in the presence of statewide fiscal limitations—the decentralized government finance archetype—and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly termed “flypaper effect”) arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot, in general, be taken as a symptom of local government overspending. An empirical application to Italian province panel data provides consistent evidence of the role of corner solutions produced by two-sided tax limits in explaining the sensitivity of local public expenditures to grants.

Economic and Political Foundations of Local Tax Structures: An Empirical Investigation of the Tax Mix of Flemish Municipalities

Building on the revenue structure theory developed by Hettich and Winer, with this paper we are the first to investigate the economic and political determinants of local tax mix choices. We thereby use panel data on 289 municipalities in the Flemish region of Belgium (period 1995–2002), where local governments enjoy extensive fiscal autonomy and have a wide choice of available tax instruments. Estimating a system of five reduced-form equations for the five central revenue sources (income, property, business, user fees, and other own revenues), our results show that economics plays a significantly more important role than politics in shaping the local tax mix. Moreover, supporting theoretical predictions about marginal cost equalization across available tax instruments, absolute reliance on each revenue source increases as the overall revenue requirement gets larger (a ‘scale effect’).

Decentralization, Competition and the local tax mix: evidence from Flanders

While numerous studies analyse the determinants of the level and composition of local public spending, little attention has been given to what shapes the choice of tax instruments used by decentralised governments. This paper bridges this gap by investigating the economic and political determinants of the local tax mix in the Flemish region of Belgium, where local governments enjoy extensive fiscal autonomy and have a wide variety of tax instruments available. Specifically, using panel data of 289 Flemish municipalities over the period 1995-2002, we estimate a system of five reduced-form tax revenue-share equations (income, property, business, user fees and other own revenues). The analysis highlights a number of important economic determinants of the observed tax mix (especially the tax base and revenue requirement), while political variables turn out to play a relatively minor role. Finally, the analysis uncovers virtually no evidence of inter-municipal dependence in the determination of the local tax mix.

Green Polities: Urban Environmental Performance and Government Popularity

Ascertaining whether local election results are driven by incumbents� performance while in office or mechanically reflect constituencies� ideological affiliation and macroeconomic conditions is crucial for evaluating the alleged accountability-enhancing property of decentralization. Based on a unique score of urban environmental performance and the results of all elections held in the major Italian cities over a decade, we investigate the role of local (fiscal and environmental) versus national issues in municipal elections. While the empirical evidence points to a strong ideological attachment and a somewhat weaker fiscal conservatism, it reveals that media reported environmental ranking has a considerable impact on the popularity of city governments

Central command, local hazard and the race to the top

This paper explores for the first time the consequences of centrally imposed local tax limitations on the modelling and estimation of spatial auto-correlation in local fiscal policies, and compares three spatial interaction estimators: a) the conventional maximum likelihood estimator that ignores censoring; b) a spatial Tobit estimator; c) a discrete hazard estimator. Implementation of the above empirical approaches on the case of local vehicle taxation in Italy provides a reasonably coherent picture in terms of the direction and size of the spatial interaction process, and offers a plausible spatial interpretation of the race to the top in provincial vehicle taxes.

Tax Limits and Local Democracy

Based on a theoretical model where state limits on local government policy elicit a move from private value (position issue) to common value (valence issue) voting, I exploit exogenous variation in tax limitation rules in over 7,000 Italian municipalities during the 2000s to show that fiscal restraints provoke a fall in voter turnout and number of mayor candidates, and a rise in elected mayors’ valence proxy and win margins. The evidence is compatible with the hypothesis of hierarchical tax limitations fading the ideological stakes of local elections and favoring valence-based party line crossing, thus questioning the influential accountability postulate of the fiscal decentralization lore.

Tax incentives for cultural heritage conservation

Investment tax credits are increasingly viewed as a privileged way of encouraging private responsibility in cultural heritage conservation. However, an overview of the empirical investigations into the effects of tax credits on investment in cultural heritage reveals that research is only at its beginning, and suggests that further inquiry is necessary in order to offer a sound guide to effective tax policy. Within a conceptual framework that relies on the increasingly shared view of cultural heritage as a capital asset, this chapter discusses the main issues that arise when evaluating the welfare consequences of indirect public support to conservation, and reviews the most frequently encountered tax credit mechanisms for private investment in cultural heritage.

Local public expenditure with piecewise-linear nonconvex budget constraints

The author analyses local authority expenditure decisions under the Block Grant system, that is, the grant distribution scheme that was in place in Britain from 1981 to 1990. The Block Grant system creates a piecewise-linear, and potentially nonconvex, budget constraint. As the choice of segment is endogenous—cither as a result of unobserved preference heterogeneity or as a result of random optimisation error—a demand function for local public expenditure cannot be consistently estimated by ordinary least squares (OLS). Instead, a two-error maximum likelihood (ML) estimation procedure is used. The results show a positive income effect and a negative price effect, both of high significance. The OLS estimate of the price coefficient is underestimated relative to its ML counterpart—because of spurious positive correlation between expenditure and price—but the OLS estimate of the income coefficient does not show a substantial bias. The two-error ML estimation results show significant evidence of unobserved preference heterogeneity and some weaker evidence of random optimisation error.