Abstract:

Local governments rely heavily on sales tax revenue. We use national bankruptcies of big-box retail chains to study sudden, plausibly exogenous revenue shortfalls. Treated localities respond by reducing spending on law enforcement and administrative services. We further study how cities with different degrees of autonomy vary in their response. Cities in home rule states react more swiftly by raising taxes or issuing bonds. A regression discontinuity in Illinois reinforces the causal evidence in support of this impact of local autonomy. Home rule cities do not appear to abuse their discretion: their bond ratings are more likely to be strong than non-home rule municipalities.