Does fiscal autonomy increase local income? Evidence from Italy

Can fiscal autonomy affect per capita income levels? We empirically investigate the impact of fiscal autonomy on per capita income through the proper use of local financial resources. Exploiting a natural experiment in Italy, we compare municipalities in the Autonomous Provinces of Trento and Bolzano, which retain and manage almost all their tax revenues, with neighbouring municipalities in Lombardy and Veneto, where only a small fraction of revenues is autonomously managed. Using a spatial fuzzy regression discontinuity design, we estimate the effect of financial fiscal autonomy on per capita income. We address the potential endogeneity of financial fiscal autonomy with a dummy variable identifying municipalities that manage almost all their tax revenues. Our findings show that higher levels of local financial fiscal autonomy increase per capita income: a one percentage point rise in the financial fiscal autonomy raises per capita income by 0.2–0.7%. This effect is largely driven by higher municipal-level administrative quality in municipalities with stronger fiscal autonomy. The results highlight that granting fiscal autonomy can enhance local economic performance.