This paper provides event-study evidence on the dynamics of strategic tax-policy interactions. Using the participation of German municipalities in state debt reduction programs as a quasi-exogenous shock, we demonstrate how these programs affect tax rates of participating municipalities. We then illustrate how competing municipalities – not directly affected by the program – adjust their tax rates in response. Combining both steps using a two-sample Wald estimator, the strategic response of competitors to a one-unit tax change by program participants ranges from 0.66 to 0.70 for the local business tax and 0.34 to 0.49 for the property tax. Characteristics of municipalities, especially proximity, influence the size and scope of tax interdependence.