Fiscal Competition among Italian Municipalities: Evidence from the Property Tax

Abstract

In 2012, Italy adopted a new real estate fiscal regime, marking a significant step towards fiscal federalism. I investigate fiscal competition among Italian municipalities in setting property tax rates (IMU and TASI) from 2012 to 2021. Employing a spatial panel dataset and an instrumental variable approach, the research explores tax-making dynamics among neighbouring jurisdictions. The political budget cycle is used as a pure exogenous variation in neighbours’ tax policies. Results align with theoretical expectations and reveal that tax rates act as strategic complements, potentially leading to a reduction in tax revenues and under-provision of local public services. Robustness checks confirm that fiscal competition is unaffected by mayoral binding term limits and is not contingent upon specific macro-areas or definitions of geographical proximity.