Fiscal Competition among Portuguese Municipalities

Abstract

In this paper we try to answer to two major research questions: Are there signs of fiscal competition among Portuguese municipalities? In which taxes are Portuguese municipalities more likely to engage in fiscal competition? According to the results obtained in this research there is a strategic interaction among municipalities when decid- ing on the rate of IRS that is fiscal revenue for the mu- nicipality. For property tax (CA) the empirical evidence is not conclusive because when we consider spatial fixed effects the coefficients of the variable that captures fiscal competition is not statistically significant. For property tax (IMI), both for non-evaluated and evaluated urban prop- erty, the empirical evidence is that there is fiscal compe- tition among municipalities when the period 2004-2007 is considered. Identical result is obtained for evaluated urban property in the period 2008-2009. However, for non evaluated urban property the results are not conclu- sive in this period of 2008-2009. For municipal business tax (DERRAMA) we also find evidence of fiscal competi- tion for the period 2000-2007, as well as for the period 2008-2009. With the exception of Contribuição Autárqui- ca (CA), the evidence on municipal fiscal competition is not substantially different by type of taxes, which may be explained by the fact that it’s a subject municipalities are recently introducing in their political agenda. Despite differences in the estimations by type of tax and period of analysis, the results do not contradict the hypothesis that political-business cycle management influences the choice of rates of municipal taxes.