ON THE DETERMINANTS OF LOCAL TAX RATES: NEW EVIDENCE FROM SPAIN

Abstract

This article examines the determinants of local tax rates. For the two main local taxes in Spain—the property tax and the motor vehicle tax—we test the existence of tax mimicking, yardstick competition, and political trends in a sample of 2,713 municipalities. Using various spatial models, the results support the hypothesis of tax mimicking, with coefficients above 0.40. We also show the relevance of political variables such as the ideology of incumbents and political fragmentation. The fact that incumbents with weaker political support exhibit stronger mimicking behavior is interpreted as evidence in favor of yardstick competition. Finally, we find that incumbents mimic neighboring municipalities ruled by the same political party, confirming the political trends hypothesis. (JEL C31, H71, H77)

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