The role of local tax revenues for growth and cohesion

October 2024

Local taxes play a crucial role in promoting economic growth and competitiveness at local and regional level. As the level of government closest to businesses and citizens, local authorities have the potential to create an environment encouraging economic development. The ability to raise revenue through local taxation not only provides funding for essential services, but also incentivises municipalities to support local businesses and economic activities. Given the increasing need to boost competitiveness, this could also be relevant to the future of EU Cohesion Policy, particularly in the context of the 'cash for reform' debate.

Local taxation and economic growth

The importance of local taxes in stimulating economic growth has been highlighted in a recent JRC ‘Science for Policy Brief’ on local taxes on economic activity in municipalities in EU member states (Öffnet in neuem Fenster).

In short, municipalities across the EU use a variety of local taxes to finance their activities and stimulate local economic development. The main taxes linked to economic growth include corporate income tax (CIT), local business tax (LBT), personal income tax (PIT) and local commercial property tax (LCPT) on property used for business purposes. These taxes are often directly linked to the economic performance of local businesses and the productivity of workers: