The Fiscal and Economic Effects of the Biontech Shock

• In Event: Determinants of State and Local Fiscal Policy

Abstract

We study the expenditure and tax responses to municipal revenue shocks in Germany,
leveraging quasi-experimental variation in tax revenues due to Biontech’s breakthrough in
vaccine development against Sars-CoV-2. Discretionary spending does not adjust signifi-
cantly, but treated municipalities repay outstanding debt, build up their capital reserves,
and mechanically increase their contribution to the fiscal equalization system. Munici-
palities cut local business and property taxes, but we find no evidence on increased firm
activity. The tax cuts align with municipalities’ ex ante expectation that the tax revenue
shock is permanent, which later turned out to be transitory instead and subsequently
forced them to revert most tax cuts within four years after the shock.

Authors

• Eckhard Janeba, University of Mannheim

• Felix Koehler, University of Mannheim

• Davud Rostam-Afschar, University of Mannheim