Public Finances and Fiscal Windfalls: Quasi-experimental Evidence on the Role of Institutions Under Fiscal Shocks

Abstract: We study the impact of fiscal windfalls on public finances. We use quasi-experimental variations in fiscal revenues (windfalls) to analyze their impact on local public finances. First, we take advantage of CHF 130 millions of extraordinary municipal tax revenues in the town of Rüschlikon (~5500 inhabitants) in 2013. These revenues stem from the personal income taxes of one single individual through the going public of Glencore. The extraordinary revenue was distributed to all other municipalities through the fiscal equalization scheme. Secondly, we use extraordinary variation in local fiscal revenues from the taxation of real estate transactions between 1990 and 2015. We compare the realized local allocation decisions to state-dependent “optimal” policy reactions defined ex ante, given the state of local public finances. We aim to understand the determinants of differences between optimal and realized policy and analyze the impact of local institutions as well as other politico-economic variables.