Local Tax: A comparison of hypotheses

The progressive intensification of the tax burden at local scale which has taken place in the last few years as well as the want of stable resources by local bodies is urging a general reconsideration of the modalities in which Italian municipalities are financed. This work discusses the introduction of the Local Tax in Italy, and presents different hypotheses on how it should be devised. The first part recalls the theoretical principles underpinning a tax scheme aimed at financing municipal services and confirms the soundness of a real estate property tax; the second part illustrates the equity implications of the reform proposals meant to shift from the property tax to the Local Tax; the third part presents a comparison among the different types of local tax recommended in the current debate, drawing attention to the possible effects on the tax burden and on the balancing of local bodies’ budgets. The hypotheses compared are a “secondary” municipal property tax (Imposta Municipale Secondaria – IMU S), a “minimal” local tax; and a local tax that involves a partial or complete exemption for the main house. The first hypothesis has a poor effect, particularly as regards the goal of simplification, given the low amounts and the reduced number of municipalities involved, so that it does not seem appropriate as a means of local financing. The second one, which complies with vertical harmonization, modifies the taxable base of municipalities, thus implying a reform of their present organization, a fact that, considering the current budgetary difficulties, makes this the most complex of these hypothesis. The third one, which is the one privileged in the current debate, pursues the goals of equity; the present work analyzes the possible effects of the alternatives of partial versus total exemption for the main house and discusses the modalities to finance the manoeuvre. The financing of the exemption for the main house through transfer taxes is obviously the easiest and straightest way, but it lessens the tax autonomy, and thus the financial responsibility, of local governments. Conversely, financing the exemption with an increase of the property tax on secondary houses has a limited impact in terms of tax burden and municipal revenues, since the two amounts largely compensate each other. Then again, the distributive impact is quite uncertain. From a distribution point of view, this works underlines the efficacy of a system of permanent deductions as well as the prospective relevance of Land Registry’s reform.

Published on Working Paper Siep, n. 697, settembre 2015