Fiscal Origins of Subnational Democracy: Evidence from Argentina

Abstract

Subnational governments are generally funded by fiscal rents, that is, transfers of centrally levied taxes. Existing literature concurs that fiscal federalism breeds rentierism and, consequently, hinders subnational democracy. However, in Argentina, fiscal rents do not always lead to low provincial contestation. Building on research on oil-based rentierism and fiscal federalism, we argue that this variation results from the provincial fiscal institutions that distribute central-government transfers from the province to municipalities. Specifically, we claim that as provincial fiscal institutions decentralize fiscal rents from the province to municipalities, they empower mayors to challenge governors. Conversely, as these institutions centralize rents at the province, they empower governors and weaken opposition from below. Using panel data and a comparison between Tierra del Fuego and Santa Cruz—the provinces that receive the largest fiscal transfers—we show that the effect of fiscal rents on incumbent party advantage decreases and eventually disappears as institutions become province-decentralizing.