Impacts of Neighbors on Local Tax Rates: A Space–Time Dynamic Panel Data Analysis

Abstract

This article explores the spatiotemporal pattern in the local tax system of Extremadura, a region in the southwest of Spain. Using the most relevant tax in terms of revenues at the local level in Spain, the property tax on urban land, a very general space–time dynamic panel data model with spatial and time period fixed effects, has been estimated to explore different types of strategic tax interactions among local governments. The empirical analysis uses a balanced panel database covering 383 municipalities from Extremadura for the period 2006–2015 to estimate the reaction of tax policy in a given municipality to its own past, to changes in tax policy in other municipalities, and to (direct and indirect) changes in some control variables. The results show that nominal local property tax rates are affected by tax policy inertia from the own municipality and neighboring municipalities and two observed municipal characteristics, whereas effective tax rates depend on tax policy inertia from the own municipality and property tax policies from neighboring municipalities and five observed municipal characteristics. In both cases, local spillover effects are not significant at standard statistical levels.