Socioeconomic indicators and municipal revenues: Explanatory factors of the fiscal capacity of Brazilian municipalities

Abstract This study analyzes demographic factors, state capabilities, macroeconomic indicators, and human development as elements able to explain municipalities’ fiscal capacity. The methodological procedures were based on statistical analysis, estimating linear regression models with panel data stacked in time series from 2005 to 2020, with the 5,570 Brazilian municipalities as the observation unit. Two dependent variables were defined as indicators of fiscal capacity: own revenues and revenues from local economic activity. The regression models showed that municipal indices of GDP per capita, average income, basic education index (IDEB), percentage of the service sector in GDP, and the number of public employees per capita had a positive and statistically significant explanatory effect on variations of the Brazilian municipalities’ fiscal capacity. Furthermore, the effects of path dependence regarding local tax collection in previous periods proved relevant as explanatory factors for municipal own revenue levels. Regarding the study’s limitations, although the variations observed represent only part of the factors explaining the municipalities’ fiscal capacity, the research offers a specific approach by connecting socioeconomic structures and state capacities, seeking evidence that contributes to understanding these revenue potentials. Also, it can be useful for the development of public policies and revenue redistribution mechanisms considering local needs and relationships that involve capabilities and fiscal disparities between subnational entities.