The impact of the introduction of Italian property tax on urban development: a regional regression model

Building on and empirically enlarging a previous study on aggregate Italian national data, this article tests whether the introduction of the property tax into the Italian system has dampened construction activity, as proxied by building permits. The latter are also good indicator of regulatory policy and local government behaviour. The heuristic hypothesis put forward in this article is that, because of concomitant favourable market conditions and the devolution process that began in the 1990s, the introduction of the property tax (ICI) induced municipalities to adopt less tight urban policies to offset budgetary needs and compensate for the reduction in central government transfers. To this end, it estimates an econometric model to verify the impact of the main economic variables on new housing supply. Unlike other studies, this article run an analysis at regional level and test for fixed effects and structural break. Our estimates support our hypothesis, evidencing a time effect. They also confirm that introduction of the ICI tax did not affect the construction sector. Careful attention, therefore, should be given to the issue of whether leaving urban planning and the power to levy property taxes under the same jurisdiction.