Local tax discretion in the Norwegian institutional context

The purpose of local tax discretion is usually to capture decentralisation gains and improve local democracy. A tax decision made locally makes it possible to adjust the size of the local public sector in accordance with local preferences and local cost conditions. Since political parties disagree about the proper level of taxation and the issue is important to voters, local tax discretion may stimulate political participation. While experiences in Denmark and Sweden show that the effects on local democracy are limited, the decentralisation gain could be significant in Norway because of the imbalances between private income and local government income across the country. However, these income differences also represent a challenge to the relationship between the nation-state and the local public sector, in particular since the key national welfare services are provided by the local public sector. Local governments have different ways of benefiting from local tax discretion, and new strategic games in relation to the nation-state may be played. Spending pressure towards the centre can be increased when distributional issues are more important and the conditions for central government control of distribution and stabilisation are worsened. Two alternatives for extended local tax discretion are discussed. It is argued that extended discretion in income tax should be combined with more ambitious tax equalisation to limit grant-seeking behaviour, and, along with centralized tax collection, to maintain macroeconomic control. Local tax discretion in a new general property tax could limit the problems of strategic interaction and national control.