The chosen period of analysis is not fortuitous. It is split into two legislatures - centre-left legislature up to 2001 and centre-right legislature afterward –characterised by different attitudes toward local tax autonomy and fiscal federalism. The centre-left government introduced a reform, known as administrative federalism, implying devolution of new functions to regions and municipalities in accordance with the subsidiarity principle required by the EU. In 2001 the centre-right coalition entered into power. The beginning of the new legislature was characterised by a constitutional reform aiming at strengthening local government powers. However, in a period of high and increasing national debt-GDP ratio, restrictions on local public expenditures and taxation were introduced.

The choice of the ER municipalities is not accidental too. ER is historically a stronghold of the Communist party and has been, with few exceptions, always ruled by left-wing local governments, with a correspondingly presumably clear fiscal attitude toward local taxation. The political attitude has also addressed its economic system, characterised by thousands of cooperatives with most of people in ER belonging to and working for them. The peculiar nature of the ER economic system is considered responsible for the high standard of living of its inhabitants: ER is among the richest regions of Italy. Therefore, the analysis of how the ER municipalities react to different politically-oriented central governments offers an interesting laboratory like testing of local public choices.

On the basis of a unique panel data-set containing final budget-sheets and structural data of all the 341 ER municipalities for the period 1998-2004, we study their local public finances. We, then, empirically analyze the determinants of the municipalities’ choices related to property tax and to the local surtax on income, which are the main sources of autonomous revenues of the Italian municipalities. These two taxes have different features. The property tax is related to the property values, assessed on the land-registry basis, and mainly affects the real estate owners. The local surtax on income is joint to personal income taxation and the proportional increase of its rates reduces the progressivity of the system and overall increase the income tax-burden on subordinate workers. With such instruments, we would expect that, when reacting to the central government, the left-wing local governments, required to resort their own tax revenues, prefer an increase of the property taxation rather than of the personal income taxation. We show that, together with traditional internal determinants of local tax setting policies (e.g., structural characteristics of the jurisdiction; socio-demographic characteristics of the population; local GDP…) the political orientation of the central government significantly affects local governments’ discretionary choices, unexpectedly, in a direction basically exploiting a form of fiscal illusion with the local electorate.