Fiscal Policy, Distribution of Local Economic Activity, and Road Freight Flows

In this paper, we examine whether local business taxation influences the spatial organization of domestic freight transport. We combine German directional county-to-county road freight data with county-level business tax rates for the period 2010-2023 and estimate a series of Poisson pseudo-maximum likelihood gravity models. The results reveal a robust relationship between local fiscal conditions and bilateral freight activity. Higher business tax rates are associated with lower road freight volumes, with the effect depending on the joint tax environment of the origin and destination regions. In particular, freight flows are significantly lower when both counties connected by a transport relationship are characterized by comparatively high business tax rates, highlighting the inherently bilateral nature of fiscal influences on goods movements. The estimated effects are robust to alternative lag structures, the exclusion of highly populated counties, and corrections for potential finite-sample bias. By identifying local fiscal policy as a determinant of interregional freight flows, the paper extends conventional freight-demand models beyond transport and logistics factors and establishes a novel link between public-finance institutions and the geography of economic activity.