Fiscal Federalism: The Interaction between Own Revenues and Intergovernmental Transfers in Local Governments—The Case of Municipalities in Buenos Aires

We study the interaction between intergovernmental transfers on the level and the structure of local own revenues. Based on a sample for Argentina’s local governments, specifically the 135 municipalities of the province of Buenos Aires, we find that transfers facilitate local revenues collection. This effect is more pronounced in urban local governments, with higher population density, poverty levels, and demand for public services. In addition, transfers bias own revenues composition. That is, higher transfers lead to higher local tax collection, which is obtained through less distortionary taxation (i.e., property tax). Interestingly, this bias is stronger for local governments with a higher share of divisible public goods (that are likely to be financed according to the “benefit principle”). The results are robust to a battery of different estimation methods and can be rationalized with existing theory from public finance and political economy as well. The findings might have important policy implications for local governments’ public finance.