Is There Yardstick Competition among Portuguese Municipalities?

Résumé 0

"A subject in the specialized literature is to determine if tax competition at municipal level is determined by "yardstick competition" or by "competition for resources". In the yardstick hypothesis municipal executives set rates of taxes influenced by the competition for votes in the political market, rather than influenced by the competition for mobile resources. In a previous paper (Coimbra et al., 2011) we have presented empirical evidence that there is strategic interaction among Portuguese municipalities when setting rates of municipal taxes. Nevertheless, we were not able to determine if this strategic interaction was of the "yardstick competition" type or "competition for resources". In this paper we explore the yardstick hypothesis by incorporating in the reaction functions political variables used as proxy for intensity of competition in the political market. We estimate reaction functions for RATE_IRS (income tax), RATE_DERRAMA (business tax), and RATE_IMI (property tax). Estimates were obtained using panel data for the 278 municipalities of Mainland Portugal. When the dependent variable is the rate of IMI the period 2005-2009 was considered because IMI is only collected since 2004. In the estimates for RATE_DERRAMA and RATE_IRS we have considered the period 2004-2009 and the year of 2009, respectively. Because of legislative changes in the property tax (first change in 2004 and second change in 2008) separate regressions were run against the two time periods, with a break in 2008. Models on RATE_IMI were adjusted separately for rates of evaluated and non-evaluated property, as well as for both periods 2005-2007 and 2008-2009. Models on RATE_ DERRAMA were estimated for the periods 2004-2007 and 2008-2009. The estimates confirm the existence of strategic interaction among municipalities when they set rates of income tax, property tax and business tax, which is compatible with a hypothesis of yardstick competition nexus when municipalities set rates of property tax and business tax. This empirical evidence is less clear when we use models with spatial fixed effects. Relaxing local specificities, municipalities where the mayor has a higher percentage of votes compete less in the political market and set higher rates of property tax and business tax. Furthermore, to have a majority in the municipal executive council and to belong to a left wing party is associated with higher rates of property tax and business tax. The results indicate that municipal executive councils manage the political business cycle setting lower rates in preelectoral periods."