Local Government Tax Structure

Abstract

Designing the system of local funding implies the allocation of different tax sources to local governments. This challenge is of particular interest in times of economic recession since tax revenues can stabilise local revenues and therefore limit the need of fiscal regulation. International organisations promote a shift from labour taxes towards less growth-deteriorating consumption taxes. The recommendations for local governments aim at an increase of property taxation, which yields rather stable revenues over the business cycle. At first glance, this advice seems to describe a path of optimisation, minimising adverse economic effects and providing local governments with more reliable revenues. From this starting point, we analyse local tax structures across Europe with Eurostat data from 2004 to 2018. This study reveals that in times of economic slowdown, the share of potentially more growthdeteriorating local income tax revenue increased relative to the share of consumption tax revenue. Moreover, revenue from the current local tax basket is quite dependent on cyclical variations. Both imply that there is room for improving local government tax structures. However, although there are criteria for an optimal local tax structure, revenues should match the set of public services. As local governments provide quite heterogeneous sets, there is no one-size-fits-all solution.