This paper studies local governments' public policies in a metropolitan area plagued by trac congestion, where both residents and workers consume local public goods. We develop a new spatial sub-metropolitan tax competition model which features a central city surrounded by suburban towns linked by mobile capital and mobile residents who commute to work. We show that Pareto-eciency is achieved if towns can retain their workers using labor subsidies. Otherwise, trac congestion in the city is ineciently high and local governments respond by setting inecient public policies: (i) the city over-taxes capital and under-taxes residents, which leads to too little capital and too many residents in the city; (ii) local public goods are under-provided in the city and over-provided in the towns.