Local Public Utilities' Profits and Municipal Expenses in Germany: An Empirical Analysis

German municipalities are currently struggling with growing budget deficits and other financial hardships. From a public choice point of view it seems tempting for vote-maximizing local governments to raise revenues from sources which create fiscal illusion or allow tax exports. An increasingly important revenue source of this kind are profits of local public utilities. In this paper we try to fill an empirical gap and provide data of the development of the profitability over time for selected German local public utilities. Furthermore, we develop and estimate a municipal expenditure function for a panel data set of large German cities . We found some slightly positive relationship between per capita expenses of the municipality and the disposable per capita profits of the local public utilities. This indicates that probably the German municipalities – according to our theoretical considerations – tend to burden their citizens as well as non-voters outside their boundaries with implicit taxes to satisfy their increasing financial needs.

01. December 2006

Authors Peter Haug Birger Nerré

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