The problem is not MS, most of the software used in the city government is not from them but from small, typically german companies. Same for Banks, Power/water/gas Companies etc.that also uses a lot of custom made software(1) typically done by mid-sized companies (<500 employees).
That is done for the dominant client first - Windows. And preferably for a long term stable server - again Windows (or a commercial UNIX but those cost even more). Most cities use that version since that is what they can get for the lowest maintenance contract price and lowest initial price(2).
Most software houses (some offer only .NET so they won't) will gladly sell you a Linux version - if you pay for it. And since there are a lot less customers for that version AND it has higer risks of change - you pay a lot more. München has decided not to go that route by the way, they use Citrix and WINE instead. So actually LiMux proves that there is little benefit in switching (i.e Freiburg did take a long look at LiMux and did NOT switch)
Supporting OO - again a matter of demand and payment. If you are the only one who wants it - you pay for development and testing. Guess what München did...
As for source code for that applications - all a matter of contract and "deliver with source" or "put source to escrow) are not that uncommon.
Compatible with MS - seen that. But the "how to" is typically left open. Some of the last "fat" clients I wrote had that requirement. We wrote them in - JAVA with a matching UI theme. Same for "must generate Excel sheets" - greetings from POI.
And when it comes to backends - where is the difference between "Must work with MS-SQL Server" and "Must work with DB2/ORACLE/SYBASE"? If you need the features of an RDBMS like Clustering, (near) realtime replication etc. - you will have to make a choice for one of the commercial products anyway. Oh and JBOSS runs fine on a Windows 2003 server as well.
As for the "taxes" part - I do not care who gets the money as long as they deliver and maintain the software for the required time (10+ years for government/banks etc). No "I no longer care" or "fork it if you like".
(1) And some SAP stuff with special customization
(2) And they are required by law to choose those