THE STATE handed the fiscal reins to regional governments by allowing municipalities to take a direct proportion of individual income taxes to fund their budgets. The move was part of a fiscal decentralisation plan designed to empower regional governments and cut state subsidies.
But in a recent cabinet session, when the cabinet failed to define how income taxes would be distributed to municipalities, the state left regional governments in charge of a horseless carriage.
On November 24, after the Hungarian Coalition Party (SMK) hinted that it would pull its support, the Finance Ministry withdrew a draft directive that would have defined the much-anticipated income tax distribution mechanism. The result is that municipal budgets are in limbo.
“The withdrawal of the directive from the cabinet session will complicate the creation of municipal budgets in 2005 as personal income taxes are the main source of income,” Milan Vajda, spokesman for Bratislava Mayor Andrej Ďurkovský, told The Slovak Spectator.
Most mayors welcome fiscal decentralisation of regional budgets. They feel it redistributes public finances in a way that treats towns and villages more fairly than before.
According to the mayor’s spokesman, decentralisation also makes it possible for regional governments to anticipate future budgets and plan beyond a one-year window.
However, certain regional authorities are wary of decentralisation. Citizens of larger towns will likely end up paying higher local taxes, mainly real estate tax. In some cities, local taxes might jump 30 to 50 percent - a prospect that businesses dread.
Another downside to decentralisation, some argue, is that municipalities will be forced to raise taxes to make ends meet while the state will remain “nice” in the eyes of citizens. For example, municipalities will have to make up for lost state subsidies for social projects, such as mass transportation, by raising taxes.
Even those who are generally in favour of decentralisation are grumbling about this aspect of the plan.
“The Finance Ministry says that Bratislava should cover the missing subsidy for local mass transportation, estimated at more than Sk900 million (€22.5 million) through its own tax policies, primarily through higher real estate taxes,” Vajda said.
Meanwhile, the Finance Ministry and the Association of Towns and Villages (ZMOS) have undergone a negotiation marathon over determining the fair distribution of Sk23.5 billion (€588 million) - the share of personal income taxes earmarked for municipalities next year.
ZMOS spokeswoman Olga Gáfrikova said that representatives of towns and villages tried their best to find solutions that would neither favour nor discriminate against municipalities.
The originally proposed distribution plan included three criteria for determining how much each municipality would get: size, population, and age.
ZMOS boss Michal Sýkora, representing 2,770 towns and villages, lobbied that an additional criterion should be altitude, which would take into consideration special geographical conditions.
According to Sýkora, citizens of almost all towns and villages in Slovakia will pay slightly higher local taxes and fees starting January 2005 as a result of the decentralisation.
Sýkora told The Slovak Spectator that ZMOS and the Finance Ministry have approached an agreement and made the maximum possible compromise.
He appreciates that the ministry abandoned its original plan, which would have hurt the 2,600 municipalities with less than 500 inhabitants.
“The proposal we agreed on would not fundamentally threaten any of the municipalities and is more fair to everyone than the previous one was,” Sýkora said.
As for larger municipalities, Sýkora says that in fact they will have more money in their pockets than they had in 2004, but perhaps not as much as they would like to have.
In December 2004, towns and villages are expected to collect one type of tax and twelve types of local fees. In January 2005, municipalities will be able to collect eight kinds of taxes and one kind of fee.
The Hungarian Coalition party wants a distribution model that guarantees smaller towns up to 95 percent of the finances they are used to receiving.
Agriculture Minister Zsolt Simon, who is also an SMK member, said that the Finance Ministry’s draft puts indirect pressure on smaller villages to merge.
Finance Ministry spokesman Peter Papanek rejected the SMK criticism.
“The coefficient of size might create the impression that the state is encouraging villages to merge.
“However, this is not true. The primary goal of the criteria was to respect the increasing need for finances for towns and villages that also administer inhabitants of surrounding villages,” Papanek told The Slovak Spectator.
Papanek insists that the draft directive that defines how taxes would be distributed is effective and offers a fair solution for both smaller and bigger towns.
“The main goal of fiscal decentralisation is to increase transparency in public fund management. It will create stable rules for financing, which are transparent and just.
“The distribution model we proposed eliminates subjectivity in providing subsidies from the state budget. The financial sources will be distributed based on clear criteria, valid for all,” Papanek said.
29. Nov 2004 at 0:00 | Beata Balogová