Increasing the Fiscal Autonomy of Municipalities. Principles and Options

One of the focal points of the discussion on the reform of Austrian public finances and the system of fiscal equalisation is the question of how to reform the municipal tax system. The accordance of spending and financial responsibilities (principle of connectivity) at the local level increases the pressure to execute tasks as structurally and cost-efficient as possible, as the responsible politicians are held directly accountable by tax payers. Municipal tax autonomy also enables fiscal competition between communities seeking to attract mobile citizens and firms that "vote by feet" by moving to municipalities offering the most attractive relation between public services and municipal taxes, based on their individual preferences. If, however, there are differences in framework conditions (density, centrality, income levels in the region), tax competition can be problematic.