Tax mandates and factor input use: Theory and evidence from Italy

This paper investigates theoretically and empirically the consequences of state fiscal mandates for financially distressed regions concerning the use of factor inputs (labor, capital, and energy) in local production processes. I exploit the switch from systematic state bailout of regional deficits to selectively mandated hikes in regions’ own business tax rates that took place in Italy around the mid 2000s, to identify the effects of tax policy on the regional economy. The estimation results reveal that mandated business tax increases stimulate energy use and hamper the employment of human resources in science and technology occupations.