Swiss Tax Cuts Neutralised by Local Authorities
Research
19.01.2026
Cantonal Reform in Bern Led to Higher Municipal Taxes and Expenditure
A large income tax cut in the Swiss canton of Bern had weaker effects for many taxpayers than intended by policymakers. This is because, following the 2011/2012 tax reform, municipalities increased their taxes disproportionately, thereby increasing not only their own revenues but also their expenditures. Overall, this even led to a higher effective tax burden, especially for people with higher incomes.
"When a higher level of government lowers tax rates, municipal budgets automatically come under pressure. Many municipalities do not simply offset this pressure but use the resulting leeway to generate additional revenues. As a result, a reform intended to relieve low- and middle-income households can be partially compensated by municipal counter-reactions. The distributional effects are thus shifted," explains Paul Steger, researcher at ZEW’s “Corporate Taxation and Public Finance” Unit. "Even though local authorities in Germany only have autonomy in corporate taxation and not in income tax, similar effects could also occur here in the context of corporate tax reforms. Revenue losses from the local business tax caused by the federal government’s ‘growth booster’ adopted in July 2025 could be countered by increases in municipal business tax rates, particularly in times of high municipal deficits. As a result, the effective corporate tax burden could fall far less or even rise.”
Overcompensation instead of passing on
The tax reform in the canton of Bern reduced the statutory tax burden across all income groups, especially for low- and middle-income earners. However, because a higher municipal tax rate affects all taxpayers, higher income households often benefit less from the cantonal relief. In some cases, they may even face a higher tax burden.
The ZEW study shows that, following the reform, the effective tax burden increased by up to 0.5 percentage points, depending on income level and municipality. At the same time, this shifts the fiscal balance of power: municipal taxation and municipal expenditure are gaining in importance, while the effect of the cantonal reform is partly being lost.
Tax competition dampens counter-reactions
To which extent municipalities take countermeasures depends crucially on the intensity of tax competition. In areas where households can more easily move to neighbouring municipalities – for example in border regions adjacent to other cantons – the increase in municipal taxes is significantly lower. Tax competition therefore limits the scope for municipalities to implement tax increases without risking an emigration.
About the methodology
The study uses the major income tax reform in the canton of Bern in 2011/2012 as a natural experiment and measures how strongly individual municipalities were affected by the reform based on their taxpayer structure. On this basis, it estimates how revenues, expenditures and effective tax burdens differ in the municipalities affected, including tests for pre-trends and analyses of the role of tax competition.
