Tax Autonomy and Distributive Policies of the Italian Municipalities: The Case of the Region Emilia Romagna

Silvia Fedeli

doi:10.5539/jpl.v3n2p63

Abstract

On the basis of a panel-data containing final budget-sheets and structural data of all the municipalities of the region Emilia-Romagna from 1998 to 2004, we study the evolution of the municipalities’ public finances in a period of remarkable institutional changes related to fiscal federalism. The econometric analysis shows how the local tax setting is affected by the traditional local internal variables, by the political/fiscal orientation of the central governments’ ruling coalitions and by the latter attitude to devolution of functions to lower level governments. Unexpectedly, the municipal governments exploit a form of fiscal illusion with their local electorate.

Highlights

This paper aims at analyzing the determinants of the discretionary tax power of all the municipalities of the Emilia Romagna (ER) region, in the period 1998-2004, as related to the traditional internal determinants of local tax setting as well as to the political orientation of the central government ruling coalitions and to the latter attitude to devolution of functions to lower level governments
The decisions on the surtax rate on income serve to maintain/adjust the expenditure level decided on the basis of previous year grants
After the analysis of the principal characteristics of the public finances of the ER municipalities, we have considered the effects of the interaction among different levels of governments from the point of view of the municipalities in order to verify how the latter use their tax autonomy by means of the property tax and surtax on income

Summary

Introduction

This paper aims at analyzing the determinants of the discretionary tax power of all the municipalities of the Emilia Romagna (ER) region, in the period 1998-2004, as related to the traditional internal determinants of local tax setting as well as to the political orientation of the central government ruling coalitions and to the latter attitude to devolution of functions to lower level governments. The centre-right government aiming at a lower tax pressure – announced as a primary goal during the electoral campaign - other than further reducing the central grants, tried to constraint the local tax autonomy by freezing the surtax on income by means of the state financial law for 2003: municipalities that had used it before 2003 could not increase it further, while the remaining municipalities could introduce it, but at a reduced rate (0.1% yearly rather than 0.2%); penalties for those municipalities having a budget deficit were introduced In this context, characterized by conflicting central policies as for local governments’ fiscal competences, we analyze the interaction among different levels of government from the point of view of the municipalities.

The public finances of the ER municipalities

The choice of the property tax rate

The choice of the surtax rate on income

Findings

Summary of the results and conclusions