Municipal tax restrictions and economic efficiency: an analysis of Australian local councils

This paper analyses the impact of rate capping policy on local council efficiency. It also examines a set of exogenous factors associated with local government efficiency. A semi-parametric framework based on data envelopment analysis is applied to construct an efficient frontier for Victorian local governments. Findings indicate that rate capping policy had no significant effect on the overall economic efficiency of Victorian local governments. Furthermore, the policy appears to have an adverse effect on the efficiency of metropolitan councils during the study period. The heterogeneity of local governments needs to be considered when setting rate caps.