The Dynamic Response of Municipal Fiscal Budgets to Revenue Shocks

Event Date: 28 February 2018

Speaker: Jan Stuhler, Carlos III University, Madrid

Time: 3.30 pm

Location: Strathclyde Business School, Cathedral Wing, CW506a

Abstract:

We study the dynamic causal response of local budgets to a shift in revenues.  We first isolate quasi-experimental variation in fiscal transfers within Germany’s municipal fiscal equalization scheme. Because transfers are unconditional and depend on population counts, the 1987 Census led to sudden and permanent shifts in revenues across municipalities.  Using an event-study design, we then track the causal response of municipal budgets to revenue gains or losses.  In contrast to prior work, we focus on the dynamics of this response over time. Local budgets do not adjust instantly. The total level of government spending adapts over three to four years, predominantly driven by capital and infrastructure investments. Local tax rates adjust even more slowly. Business and property tax rates decrease in response to revenue gains, but the decline stretches over at least one decade. We contrast these findings with prior evidence on the “flypaper effect” and other empirical regularities, as well as theoretical work on local public nuance.

Published: 5 December 2017