Capitalization of Local Taxes and Expenditures - The case of Bavarian Municipalities

This paper examines capitalization effects of fiscal variables such as taxes and public expenditure into land prices in Bavaria. Based on panel data analyses on municipality level we discuss the potential existence of capitalization as well as the changes over time possibly related to supply reactions. Especially, we check the persistence of these effects using the approach in Stadelmann and Billon (2015). So far, we conclude that capitalization of fiscal variables seems to occur in case of property taxes and for categories of public expenditures. Persistent capitalization seems to hold for taxes but not for expenditure. Furthermore, the effect of tax capitalization is only robust for less relevant property tax A. Our results are contradictory to international studies (Sirmans, Gatzlaff, & Macpherson, 2008) and findings for German wages in case of the local corporate taxes in Fuest, Peichl, and Siegloch (2016). The missing capitalization of the German local corporate tax is surprising and may be explained by the observed tax harmonization. Our further research will focus on either confirming or invalidating these results and address the remaining lack of clarity.