The Effect Of Industrial And Commercial Land Consumption On Municipal Tax Revenue: Evidence From Bavaria

This paper aims to quantify the municipal tax-revenue effects of increases in built-up areas. The assumed existence of these effects is one of the key reasons for ongoing land consumption on the part of the municipalities. Some previous case studies have however suggested that these effects may not be large enough, especially in rural municipalities, and would thus make land development unprofitable. We estimate the effect of built-up industrial and commercial (BIC) area change on business tax revenues in cross-sectional instrumental variable estimations. Based on detailed data for Bavaria, we find that an increase in municipal BIC area has a significant and positive tax-revenue effect. The size of this effect differs sharply between urban and rural municipalities and between cities with different population densities. The positive overall effects become much smaller when large cities are excluded from the sample. Based on these findings, we reflect on the tradable planning permits scheme recently discussed in the literature on land use in the context of policies aiming to limit land consumption. In addition, we relate our estimates to the average municipal costs for land development and undertake a number of robustness checks.