Comprehensive Tax Autonomy of Austria's Bundesländer

Federalism in Austria is heavily centralised, especially regarding the assignment of tax competences between the federal level, the Länder and the municipal level. Over 90 percent of total tax revenues are levied in the form of "joint taxes". These are shared between governmental levels according to allocation formulas codified in the Finanzausgleichsgesetz (fiscal equalisation law). This revenue sharing system strongly violates the principle of institutional congruence. Against this background, the study investigates pros and cons of substantial tax autonomy of Austria's Länder governments. Based on a comprehensive review of relevant theoretical and empirical approaches, the study develops a list of criteria to check feasible options for higher Länder tax autonomy. Using regional tax statistics data, we simulate static revenue effects of higher tax autonomy concerning wage taxes and personal income taxation, corporate income taxation, and motor vehicle insurance taxes at the Länder level. It can be shown that, apart from the theoretical benefits, autonomy for wage and personal income and motor vehicle insurance taxation could be implemented without major tensions, provided that it is complemented by a suitable horizontal fiscal equalisation scheme. Länder autonomy regarding the corporate income tax would lead to substantial frictions as compared to the current system.