Does intense tax competition boost public acceptance for inter-municipal cooperation? Evidence from a survey among German citizens and local politicians

ABSTRACT

Intense tax competition among local governments limits their potential for tax revenues. Inter-municipal cooperation (IMC) in general and joint business parks in particular constitute a platform to coordinate local tax rates with neighboring municipalities to reduce tax competition. We ask whether local politicians and citizens are aware of this logic and whether they account for it. Using survey data from German municipalities, we find citizens’ support for joint business parks to increase in the intensity of tax competition but not for other forms of IMC. For local politicians, we do not find any effect of tax competition on IMC support.

KEYWORDS:

• Inter-municipal cooperation
• joint business parks
• citizens’ preferences
• politicians’ preferences
• local tax competition

JEL CLASSIFICATION:

• D72
• H71
• H77

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. We do not review the abundant literature on the emergence of IMC that motivate our use of municipal-level control variables in our analysis. In this regard an excellent overview has been delivered by Bel and Warner’s (2016) meta study. Also, the emergence of joint economic development projects has been analyzed in a number of studies. Using data from a survey among local development officials, Feiock et al. (2009) provide rich insights on obstacles and drivers in the US setting: heterogeneity across neighboring jurisdictions, such as economic or land-use disparities turns out to be a major barrier for cooperation. Strebel and Bundi (2022) show that (Swiss) IMC activity varies along the perception of a respective policy field: Cooperation is less likely in policy fields perceived as “politicized” and more likely in fields perceived as “relevant” by local office holders.

2. Recent empirical studies on the impact of IMC on tax competition show that the formation of French “establishments for inter-municipal cooperation” lead to an increase in the local tax burden (Agrawal, Breuillé, and Le Gallo 2020; Breuillé, Duran-Vigneron, and Samson 2018). It should be noted that these institutions are similar to fully-fledged jurisdictions – similar to the German “Verbandsgemeinde” – with its own elected council, a wide range of tasks and the right to raise own taxes. Thus, their introduction is much more far-reaching than thematic IMC-arrangements such as joint business parks.

3. Some small businesses, service providers and retail traders are situated in mixed zones that allow for certain business activities and housing in the same quarter. At the same time, firms from most other sectors, especially from manufacturing, wholesale and logistics, as well as large parts of the retail trade sector, are located in special business areas. In the last decades, German municipalities provide additional commercial land almost exclusively in the form of business parks.

4. When firms develop business parks jointly, they generally settle their agreements in a formal contract. This contract covers all relevant aspects of joint land development – including the division of investments, running costs and future tax revenues (Bischoff, Melch, and Wolfschütz 2021).

5. The argument also applies to local politicians. The survey revealed that virtually all local politicians are active in the above-mentioned form. This is why we did not include it for local politicians.

6. We use the stata command survwgt and municipapl-specific information on the above-mentioned variables.