Tax cuts and tax compliance: evidence from grants to Green municipalities

This work examines whether a reduction in a salient local tax can increase tax compliance. To achieve identification, we leverage a quasi‐natural experiment occurring in Italy: since 2016, a regional law has granted a reduction in the waste tax burden for inhabitants of municipalities with an efficient waste collection system. Using municipal balance sheets data, a matched control group of non‐treated municipalities and staggered difference‐in‐differences strategies, results show that, in this specific institutional setting, the share of tax compliance in municipalities benefiting from the tax reduction increased relative to matched non‐treated municipalities (an average treatment effect on the treated of 6.4 per cent). Robustness and falsification tests confirm that our findings are specific to waste taxation remittances and pertain exclusively to the subsidised municipalities.