The Political Economy of Local Governments’ Requests for Permission to Override Central Fiscal Limitations: Insights from Israel

Abstract

Central governments often restrict municipalities’ ability to raise or reduce taxes, but, in many jurisdictions, municipalities can ask the central government’s permission to set aside these limitations. Using an Israeli dataset, we explore this prevalent, yet unexplored, mechanism we call Permission to Override (PtO). We find that in Israel, at least, the central government’s approval and rejection of these permission requests seem to be equitable and non-political. However, despite the central neutrality, municipalities with lower socio-economic status and fewer political connections tend not to submit requests. Municipalities are also reluctant to submit requests before elections and tend to submit them only afterwards. These socio-economic and political biases may create inequalities and hinder a successful use of the PtO mechanism. We discuss the limited use of this mechanism (requests amount to approximately 0.6 percent of the total property tax income) and its shortcomings and draw conclusions from the Israeli case study.