The influence of decentralized taxes and intergovernmental grants on local spending volatility.

We study what affects the volatility of sub-central spending in 20 OECD countries. The evidence based on data from 1972 to 2007 shows that the volatility of intergovernmental grants from upper levels is positively associated with the volatility of local expenditure. On the contrary, the volatility of local tax revenues - mainly that of property taxes - exerts the opposite effect. Thus, making local governments rely more on grants than own taxes seems to adversely affect the stability of their spending, while allowing them to autonomously levy taxes on responsive tax bases provides incentives to smooth their expenditure.