The dynamic response of municipal budgets to revenue shocks Articles uri icon

publication date

  • July 2024

start page

  • 484

end page

  • 527

issue

  • 4

volume

  • 16

International Standard Serial Number (ISSN)

  • 1945-7782

Electronic International Standard Serial Number (EISSN)

  • 1945-7790

abstract

  • We study the fiscal and tax response to intergovernmental grants,exploiting quasi-experimental variation within Germany’s fiscal equalization scheme triggered by census revisions of population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while the adjustment to losses is more rapid. Yet the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical anomalies such as the so-called flypaper effect may thus reflect a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism.

subjects

  • Economics

keywords

  • fiscal policy; state and local taxation; subsidies and revenue; state and local budget and expenditures; intergovernmental relations; federalism; secession; finance in urban and rural economies