No. 12/2006
PROPERTY TAXATION AS INCENTIVE FOR COST CONTROL:
EMPIRICAL EVIDENCE FOR UTILITY SERVICES IN NORWAY
Lars-Erik Borge
Jørn Rattsø
Abstract:
Recent theoretical research suggests that property taxation has incentive
effects that can help
control cost problems in the public sector. The institutional setting
in Norway allows this first
empirical investigation of the incentive effect of property taxation,
since we can separate
between local governments with and without property tax. The raw data
of the variation in
the unit cost level for utilities show that local governments with property
tax have about 20%
lower unit cost. Using both linear regression and propensity score matching,
we are not able
to wash out the difference in unit costs. Our interpretation is that
having a visible and
controversial local tax related to property stimulates voter interest
in local government
activities and thereby may help cost control. The incentive effect is
of interest for the design
of fiscal federalism.
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