Measuring horizontal fiscal imbalance: the case of Italian municipalities

In the literature on fiscal federalism, vertical fiscal imbalance has been widely studied, while the theme of horizontal fiscal imbalance and inequality among local governments, due to differences in their fiscal capacities, has been less explored. This article contributes to fill the gap. A new method to compute fiscal capacities based on regression analysis is proposed, which can overcome some of the drawbacks of traditional methods such as the representative tax system. This new approach is then employed to evaluate the fiscal capacities of Italian municipalities over the period 2002–2010. Finally two global measures of the horizontal fiscal imbalance are used to evaluate the equity implication of a major policy change occurred in 2008 in Italian municipal finance.