What are the fiscal effects of municipal mergers?
The tax rate in these municipalities, at least the part that goes to the municipality itself, is determined at the local level. Evidence shows that on average the tax rate goes down after a merger, particularly in smaller municipalities that may have had a relatively high tax rate beforehand, an area of great interest to Professor Köthenbürger and his colleague in the project. “Why are the tax rates in smaller municipalities that participate in mergers so high?” he asks. This is partly a reflection of their fiscal needs and the challenges they encountered in providing services, which is one reason why they may seek to merge with larger municipalities with lower rates, while Professor Köthenbürger says the prospect of reduced taxes is also attractive to the population affected. “There is a need to effectively compensate the population in the smaller unit that is giving up a degree of identity, of political autonomy. One way to compensate is by reducing taxes,” he explains. This would be more difficult in a case where a municipality participating in a merger had a low tax rate already, where any further reductions would have a significant impact on revenues. The data shows that smaller municipalities tend to have a higher tax rate than the merging partner, leaving room to compensate the local population via reductions. “The relative difference in tax rates gives us an indication of how much scope there is to compensate the
smaller municipality for the loss of autonomy,” outlines Professor Köthenbürger. There are also other ways to compensate the smaller municipality, for example by committing to keeping schools open so that students don’t have to travel too far, but Professor Köthenbürger says tax reductions tend to hold particular weight. “It’s possible to make promises like improving road connections between two municipalities, but then the question is; how credible are these promises? One way to really demonstrate commitment is by lowering taxes,” he says.
achieve comparable living standards across Swiss municipalities. “These equalisation systems may be interpreted as reducing the tax autonomy of municipalities, because they have to give up some tax revenues,” continues Professor Köthenbürger. The use of tax rate reductions to compensate for the loss of identity and political autonomy might be influenced by the equalisation system, which differs across cantons. To account for it, “We are conducting our research within cantons, as then we can compare municipalities that are subject to the same equalisation system,” as emphasized by Professor Köthenbürger.
The effect of mergers on municipalities is a topic of interest not only in Switzerland, but also in other countries where mergers take place at the local level. A promise to improve transport connections may take several years to fulfil, in which time there may be another election and priorities may change, whereas the tax rate can be reduced much quicker. Once taxes have been reduced, it then becomes more difficult to increase them in future, so it may be viewed as a more concrete shift. “In that sense reducing taxes is a commitment device, not only to do it now, but also to keep them low in the future,” says Professor Köthenbürger. Municipalities are embedded in a fiscal equalisation system, reflecting a desire to
Expenditures The municipalities also have a high degree of autonomy on tax expenditure, yet evidence suggests that mergers don’t have a significant impact in this respect. While there is often an increase prior to the implementation of the merger, this may be due to the preparatory work involved, and expenditures typically go back to their previous level within a few years. “If you look at data from five years after a merger, expenditures are at more or less the same level as before the preparations for the merger started,” says Professor
Switzerland is a highly decentralised country, and municipal governments have a significant degree of autonomy at the local level over fiscal policy and expenditure. What is the fiscal effect of mergers between municipalities? What happens to tax rates and expenditures? These questions are at the heart of Professor Marko Köthenbürger’s research. A high degree of political authority is devolved to the local level in Switzerland, where municipal governments have extensive powers over fiscal policy and expenditure. While many people feel a strong sense of identity with the municipality in which they live and relish its autonomy, there are also arguments in favour of merging municipalities. “Through merging or cooperating, municipalities may be able to realise economies of scale and procure goods more efficiently,” points out Marko Köthenbürger, a Professor in the Department of Management, Technology and Economics at ETH Zurich. As the head of a research project based at ETH Zurich, Professor Köthenbürger is investigating the fiscal effects of mergers on municipalities,
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in which their size is an important consideration. “A smaller municipality in Switzerland may have between 500-1,000 inhabitants while at the other end of the scale there are quite large municipalities, like the city of Zurich. Further towards the Alps, municipalities are generally quite small,” he says.
Local services A smaller municipality may have difficulty in recruiting qualified personnel to run local services, while they also have to meet certain standards in the provision of services, and it is these smaller, less well-connected municipalities that tend to seek to merge. The aim may be to help them work more efficiently, but a proposed
merger first requires the consent of the populations affected. “A merger process in Switzerland is subject to a referendum by all the participating municipalities,” explains Professor Köthenbürger. While many proposed mergers have been rejected in Switzerland over recent years, others have been approved, now Professor Köthenbürger and his colleague in the project, Christian Stettler, are analysing the data on tax rates and expenditures in these latter cases. “We’re investigating how these mergers affected the fiscal outcomes in terms of tax rates and expenditures,” he outlines. “We have data on the socio-economic characteristics of these municipalities, as well as on things like their size, population, age structure and taxable income.”
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Fiscal effects Fiscal effects of inter-municipal cooperation and mergers
Project Objectives
Switzerland is a highly decentralised country, and municipal governments have a significant degree of autonomy at the local level over fiscal policy and expenditure. What is the fiscal effect of mergers between municipalities? What happens to tax rates and expenditures? These questions are at the heart of the research project.
Project Funding
This project is funded by the Swiss National Science Foundation (SNSF).
Contact Details
Project Coordinator, Marko Köthenbürger ETH Zürich Dep. of Management, Technology, and Ec. Prof. Dr. Marko Köthenbürger Professur f. Öffentliche Finanzen LEE G 110 Leonhardstrasse 21 8092 Zürich Switzerland T: +41 44 6325446 E: koethenbuerger@ethz.ch W: https://pec.ethz.ch/ W: https://mtec.ethz.ch/people/ person-detail.MTkzNDQw. TGlzdC8yODk2LC0yMDgyMjgwMDQ4.html
Marko Köthenbürger
Marko Köthenbürger is a Professor in the Department of Management, Technology and Economics at ETH Zurich. His main research interests are public economics and political economy, and he has published extensively in economics journals.
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Köthenbürger. While this may on the surface seem to suggest that mergers don’t help municipalities achieve economies of scale, Professor Köthenbürger says analysis of subcategories shows a more complex picture, where certain savings can be achieved. “If we have a detailed look we find certain indications that there are economies of scale,” he outlines. “For example after a merger public administrations don’t have to replicate certain functions, and this is reflected in administrative expenditures.”
the national border. “The effect of mergers on municipalities is a topic of interest not only in Switzerland, but also in other countries where mergers take place at the local level.” Many municipalities in countries across Northern Europe have merged over recent years, as decision-makers strive to strike the right balance between local autonomy and efficiency. While Swiss municipalities have a high degree of autonomy over both tax policy and expenditure, in many other countries local governments have less control over tax
We’re investigating how mergers of municipalities affected the fiscal outcomes in terms of tax rates and expenditures. The Swiss setting is interesting to study since, relative to other countries, municipal tax and expenditure autonomy is significant. The finding that expenditure savings relate to administrative expenditures only may be related to the fact that municipalities cooperate with each other without losing political autonomy, another topic that Professor Köthenbürger is investigating in the project. Two municipalities may coordinate on specific issues like rubbish collection for example, and this improves efficiency already. The main goal in the project is to assess whether there are any systematic patterns in the fiscal outcomes of mergers, and while the empirical data relates to Swiss municipalities, Professor Köthenbürger says this research holds wider relevance beyond
policy, so may take a different approach when it comes to compensating local residents affected by a merger. “They cannot always redistribute savings via tax rate reductions, so they may increase other expenditures in order to benefit local residents,” explains Professor Köthenbürger. In the Swiss case, mergers tend to lead to tax rates going down, which might lead to more intense competition between municipalities, says Professor Köthenbürger. “To what extent can mergers be seen as a way to reduce taxes?” he asks. “ The merger process typically isn’t initiated to increase competition, but it can have that unintended effect and provoke reactions in other municipalities.”
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