The consequence of urban shrinkage: Investigation on the local fiscal revenue

Previous research on urban shrinkage has primarily focused on conceptual development and identifying underlying drivers. This paper seeks to extend this foundation by proposing a comprehensive analytical framework, grounded in a review of relevant literature, to examine the fiscal implications of urban shrinkage. Specifically, we explore the impact of population decline, a defining characteristic of urban shrinkage on local fiscal revenues. Applying our framework to the context of Japan, we discover that urban shrinkage significantly deteriorates local fiscal revenues, particularly affecting building taxes. However, the heterogeneity shows that the impact of shrinkage on land tax and depreciated assets tax appears to be less pronounced. This study enhances our understanding of the fiscal consequences of urban shrinkage and offers valuable insights for policy-making at the local government level. • The paper examines the relationship between urban shrinkage and local fiscal revenue using municipal-level data from Japan. • We focus on the consequences of urban shrinkage rather than its definitions or causes. • Urban shrinkage significantly deteriorates local fiscal revenues. • A decrease in building tax is the primary contributor to the fixed asset tax loss during urban shrinkage.