Yardstick competition and the political costs of raising taxes: An empirical analysis of Spanish municipalities

Abstract

We test the ‘yardstick competition’ hypothesis by looking at the effects of property tax increases both in the locality and in other comparable jurisdictions on the incumbents’ vote. In order to obtain unbiased estimates of the effects of taxes on voting, we account for national political shocks, ideological preferences of the citizenship and government traits, and we estimate the vote equation using instrumental variables. We also allow various traits of the government (ideology, coalition government, and first term government) to mediate the effects of taxes on voting. The vote equation was estimated using a large database containing nearly 3,000 Spanish municipalities and analyzing three local elections (1995, 1999 and 2003). The results suggest that property tax increases, both at municipality and neighborhood level, have a non-negligible impact on incumbent votes, and that this impact is especially high when: the government is right-wing, is a coalition, and is not in its first term.