Sylvie Charlot, Ph.D.1, Sonia Paty, Ph.D.2, and Virginie Piguet, Ph.D.1. (1) Economics, INRA, 26 Bd Dr Petitjean, BP 87999, Dijon, 21079, France, (2) Economics, University of Lille, EQUIPPE, Villeneuve d’Ascq, 59655, France
In the tax competition literature, theoretical models on vertical externalities generally show that the combined (aggregated) equilibrium tax rate of two overlapping governments, which share a common tax base, is higher than a single revenue-maximising government tax rate (see for instance Flowers, 1988). The main purpose of this paper is to assess the effects of tax-base sharing on local taxation by using the French experience in intermunicipal cooperation.
Most French municipalities are grouped in larger jurisdictions which are called in French ‘Etablissements Publics de Coopération Intercommunale’ or EPCI. Since the ‘Chevènement’ law in 1999, intermunicipal cooperation is particularly favoured in France and has been chosen by a growing set of municipalities (more than 13.000 in 2004). Municipalities and groups of municipalities are responsible for local urban services, building, and maintaining nursery and primary schools and sport facilities, municipal roads and urban public transport.
In France, local revenues mainly come from taxation (54%) and grants (23%). The local business tax or ‘taxe professionnelle’ accounts for approximately 45% of revenues from local taxation. Its base is mainly made up of capital goods. Furthermore, groups of municipalities and municipalities have a large autonomy to set their tax rate on that tax base. Groups of localities (or EPCI) can set an additional rate of business tax or else they can set a single tax rate which is called “Taxe Professionnelle Unique” (Single Business Tax). In the first (additional) case, there is a tax-base sharing between municipalities and the intermunicipal group. In the latter (single business tax) case, the municipalities do not set their own tax rate and there is no tax-base sharing anymore.
Our aim is therefore to assess the effect of tax-base sharing on local taxation in the French case. We therefore estimate a model of tax setting for the local business tax using dynamic panel and spatial econometrics techniques for the period 1983-2003.
We first observe a positive effect of intermunicipal cooperation on local taxation. However, this impact is shown to be lower when groups of localities set an additional rate of business tax than in the single business tax case, suggesting that tax-base sharing has not the expected effect on local taxation.