The subnational crowding out effect of mining windfalls on local tax effort: Does the level of local provision of public goods matter?

Although the resource curse offers evidence for the national crowding out generated by resource windfalls from mining, subnational crowding is not fully understood. This knowledge gap is problematic because these windfalls should cover the negative externalities that exist in host zones. Additionally, these communities have different fiscal responsibilities due to the mining industry's environmental, economic, and social costs. This article estimates the subnational crowd out of mining windfalls on local tax collection by considering different levels of fiscal responsibility. We employ panel data for 322 Chilean municipalities between 2008 and 2019 using an exogenous rule for assigning mining windfalls in order to attribute causality. Our results confirm the crowding-out hypothesis. First, a US$1.0 increase in mining windfalls results in a US$0.2 decrease in the property tax collected. Second, subnational crowding out is twice as high in municipalities with a high level of fiscal responsibility; a US$1.0 increase in windfalls crowds out US$0.4 in non-resource revenue. Third, considering the influence of nearby neighborhoods and the spatial interdependence, crowding out is four times higher than non-spatial estimations. These results call for local policies that consider the fiscal capacity of a municipality in order to disincentivize undesirable behavior from extra resource revenues.