Revisiting the link between resource windfalls and subnational crowding out for local mining economies in Chile

Peer Reviewed
1 December 2019

Mauricio Oyarzo, Dusan Paredes

Literature on the resource curse argues that resource windfalls, such as those resulting from a commodity price boom, crowd out several determinants of long-term fiscal income (Papyrakis and Gerlagh, 2006). Although empirical literature tests this theory at an intercountry context, similar attention has not been paid to that of subnational governments. This different type of spatial scope would reveal how low-tier governments strategically behave in regard to resource windfalls and covering local costs. Any strategic behavior will directly impact the local community's well-being due to the role played by subnational governments in providing local public goods. We contribute to this gap in the literature by analyzing how the resource windfalls from mining taxes in Chile crowd out local collected revenue such as a residential and a commercial property tax. Using panel data for 345 Chilean municipalities between 2008 and 2017, we pursue the causal effect derived from a subnational crowding out hypothesis, measured as the cross substitution between an additional monetary unit received from windfalls. We also take advantage of the exogenous allocation rule for the distribution of mining taxes in mining municipalities via the Chilean National Mining Code. Our results are robust and do not reject the hypothesis: mining taxes crowd out property tax collection. Tax laziness is maintained after considering for potential endogeneity and heteroskedasticity imposed by spatial autocorrelation. Our results call for local policies that focus on discouraging undesirable behavior in the collection of local property taxes in mining municipalities.

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Publication | 20 January 2021