Interjurisdictional competition is central to public finance, yet most empirical work studies a single policy instrument. This is at odds with fiscal federalism in practice, where lower-tier governments set multiple instruments simultaneously and interdependently. We study multi-instrument tax competition using German municipalities exploiting roughly 30,000 business tax and 37,000 property tax changes. Estimating a distributed lag model to identify policy response functions within and between municipalities and across tax instruments, we find strong evidence that business and property tax rates are strategic complements. Complementarities arise within municipalities, across municipalities within the same tax, and across municipalities across taxes. These results imply that standard within-instrument approaches can overstate the slope of the response function by attributing joint multi-instrument adjustment to strategic interaction in a single tax.

How do policies spread across jurisdictions when policymakers respond to potential competitors idiosyncratically? We develop a new approach to measuring network ties from policymakers’ revealed references and apply it to local business taxation in Germany. Using 3,982 policy narratives from 3,129 tax reform debates, we show that local politicians selectively invoke peer jurisdictions, with references varying by shared municipal characteristics and political ideology. We use these patterns to predict the network of policy interactions across Germany’s municipalities and combine it with plausibly exogenous tax reforms in selected municipalities to study tax competition. Tax changes propagate substantially through this network, including across state borders, with approximately 22 percent of an initial tax shock transmitted to exposed municipalities. These effects are larger than those found in previous studies using generic network structures, helping to reconcile conflicting evidence on the extent of local tax competition.

The literature in urban economics has highlighted the importance of urban amenities. This study shows that urban amenities also play a significant role in spatial tax competition. We incorporate urban consumption amenities into a spatial tax competition model in which regions compete for spatially mobile tax bases. In the model, consumers engage in cross-border shopping by purchasing goods in regions with lower tax rates. We find that the presence of urban amenities raises equilibrium tax rates not only in the region containing the city center but also in surrounding regions. This upward effect is heterogeneous across regions. Consequently, urban amenities mitigate tax competition and generally enhance the fiscal capacity of local governments. They may serve as an alternative to tax coordination or subsidies in addressing the inefficiency of low equilibrium tax rates under tax competition.