Transfer revenues, expenditures and tax effort of Slovenian municipalities

Abstract

This study has examined the expenditure and tax effort effect of municipal transfer revenues in Slovenia. Namely, transfer revenues received by local governments should stimulate provision of local goods and services, and consequently increase local spending. It is also predicted that this increase should be larger than one related to the equivalent increase in local income. Moreover, transfer revenues of local governments should also affect local tax (revenue collection) effort, either by increasing it (stimulation effect) or decreasing it (substitution effect). The empirical evidence based on the data for Slovenian municipalities has showed that transfer revenues have absolutely and relatively larger effect on municipal expenditures than the equivalent increase in income. However, transfer revenues have negative effect on local (municipal) tax effort, which means that substitution effect exists as transfers obviously substitute other local revenues.