Local tax increases are sometimes more numerous than reductions

23.07.2018

The trend of rising local taxes, which has been observed in recent years, continues in 2018.

Bulgarian municipalities increase key local taxes to secure the necessary own resources and, in some cases, to meet their commitments to the finance ministry as a result of the interest-free loans received in recent years.

This development is not surprising given the stalled process of fiscal decentralization, but higher local taxes can not address the structural problems of municipal budgets.

What the data shows

Between 2012 and 2018, IME conducted 7 separate annual surveys on local tax levels as part of the Regional Profiles: Indicators for Development initiative. The data are collected through applications under the Access to Public Information Act (APIA) to all municipalities in the country, as well as by online rates checking. We look at four of the key local taxes:

 

- real estate tax - non-residential property of legal entities;

- tax on vehicles and passenger cars - 74 kW - 110 kW;

- annual patent tax for retail trade up to 100 sq.m. commercial area;

- transfer tax.

 

The results obtained are unequivocal: the cases of increase of the observed local taxes are many times more numerous than the cases of reduction of the ones, the trend being particularly pronounced in 2016 and 2017, just after the entry into force of the so-called rehabilitation of municipalities.

 

Figure 1: Number of changes in the level of local taxes and fees over the years (2013-2018)

Source: IME on the basis of APIA applications to municipalities

It can be seen that:

- The trend towards raising the level of key local taxes continues in 2018. IME-registered increases have been 37 compared to 2017, and declines - only 4 - a record low for the period;

- For the period between 2013 and 2018, we have recorded 254 cases of local tax increases, while cases of reduction are nearly five times lower;

- Two-thirds of the increases were recorded over the last three years;

- The annual real estate tax is most often increased, followed by the tax on property gains and taxes on vehicles.

Why increasing local taxes will not help

According to the latest comparable Eurostat data, local government revenues in Bulgaria amounted to only 7.3% of GDP in 2017, which is more than twice as high as the EU average of 15.4%. Although raising the level or collection of key local taxes may lead to some improvement in the state of municipal budgets, the problems with their structure remain.

Bulgarian municipalities remain highly dependent on transfers from the central government, which form close to 2-3 of all their revenues. This ratio not only creates theoretical but also real political dependencies and can not be overcome within the existing local tax arrangements;

Enforced channels to secure own funds (mainly from property taxes) provide limited fiscal space and do not create a real opportunity for tax competition. Given that the relative share of local taxes in the total tax burden on citizens and businesses is insignificant, changes in both directions have no particular effect on the decisions of economic agents;

With very few exceptions (large cities, resort municipalities and municipalities with large concessions), municipal budgets do not in any way reflect what is happening in the local economy;

The low share of own revenues leads to the inability to implement local policies, even if there is a public and political consensus at the local level, which in some places leads to a senseless democratic process.

The simplest and most readily applicable method for changing this status quo is to remit some of the proceeds from the personal income tax (DFL) to the municipalities on the principle "money follows the ID card". Assigning one-fifth of the DDLL revenue projected for 2018 will increase municipal revenues by nearly $ 675 million (ie nearly a third) and create real incentives for local authorities to work to attract investment and opening new jobs. The necessary steps to achieve a real change in the structure of municipal budgets were described by IME in the study "The Way to Fiscal Decentralization", published in April 2018, where an estimate of the potential revenues that can be relied upon by each municipality upon accession of this step.

The road to fiscal decentralization

The transfer of part of the revenues from the DDL to the municipalities can not and must not be isolated, an objective and unconditional change in the structure of the tax system.