Issues of Taxation with a Decentralized System:

In a multi-level government structure some taxes with relatively narrow base are to be assigned to enable the local governments to raise the required resources to finance its public services.  In such case, the revenue raising capacity of these governments would be limited due to partial migration of the tax bases from one jurisdiction to another.  In several countries the local governments recognized the fact of induced locational effects as far as their tax bases are concerned.  The only exemption in general, is the property taxation in almost all countries including the USA.  However, unrestrained property taxation results in reduced economic development of a local jurisdiction which in turn reduces the real property tax base.  So the local governments need to use the tax bases as well as the tax rates very carefully.  What is important is the elasticity of the local tax base with respect to the rate of taxation.

In fact the efficiency of the local tax policy depends upon the knowledge of elasticities of tax bases of different taxes.  It is to be noted that an increase in the tax rate of any tax base yields increased revenues only if the tax base is inelastic. The elasticity of the tax base is determined by factors such as the degree of mobility of tax resources, the rates of similar taxes in the surrounding jurisdictions, the amount of public services provided by neighboring communities etc.  Any extra taxation, as felt by the individual economic units, would lead to relocation and diversion of business and industry and even the residents,  other things being equal.