This paper analyzes the impacts that fiscal transfers have had on the tax effort of Peruvian municipalities.It is argued that while municipalities have shown little enthusiasm towards collecting more revenues on property tax, institutional constraints hindered local governments to do so: municipalities had little policy choice to improve revenues out of property tax due to the setting of rates and valuation at the central level. The data available does not show a substitution effect for the last four years. While the yield on property tax is low, there are no signs that increases in transfers has on average had a negative impact so far. Property tax has risen slowly, hindered by various institutional constraints at the central and local level as well as by line ministries/entities. Nevertheless there exists great unused potential for increased property tax collection.The fiscal base of local governments in Peru remains small for municipalities for various reasons. These include insufficient local capacity for revenue generation in the majority of municipalities, restricted revenue bases, excessive central control over bases and rates, and not enough incentives from the central government. For the time being it might be objectionable but understandable behaviour for local authorities in Peru not to engage considerable resources in the enforcement of property tax because bases are narrow and have modest yield prospects. The tax base has eroded in the past due to the double link to a) the valuation of property by a central governmental entity which was offset even by moderate inflation and b) the indexing of the progressive property tax rates to a fast rising reference value. More or less passively accepting whatever revenue happened to come in might have been the most reasonable approach for most municipalities.Underlying poor local governance however, are political liabilities from the autocratic Fujimori regime (1990-2000) which neglected municipalities or even had been more interested in poor governance on the local level, paralleling (partly with financing from international institutions) essential local service provision by decentralised specialist agencies.

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