This paper investigates the effect of local property tax for businesses on firm performance by using a panel of Italian manufacturing firms. To identify this effect, we implement a pairwise spatial‐differenced estimator and exploit the exogenous variation in local property tax rates caused by the political alignment of local and central governments. We find that business property taxation has a sizeable negative impact on equipment, the more volatile part of tangible assets, employment, and value‐added. We interpret these results as evidence of a distortionary mechanism. When heavy equipment are included in the business property tax base, as was the case in Italy during our estimation period, business property taxation depresses investment and induces firms to also reduce output and downsize.