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STATE CABINET APPROVES DIRECTIVE THAT DEFINES INCOME TAX DISTRIBUTION MECHANISM

Town budgets are "go"

THE CABINET has finally defined how state income taxes will be distributed to regional governments and municipalities, allowing towns and villages to get on with the task of designing their 2005 budgets.
On December 2, the cabinet approved a directive establishing the distribution of income tax revenue worth Sk31 billion (€775 million).
As a result of budget decentralisation, municipalities and regional governments are entitled to a direct proportion of state income taxes to fund their budgets.


MICHAL Sýkora: It was impossible to ensure that no one got hurt.
photo: TASR

THE CABINET has finally defined how state income taxes will be distributed to regional governments and municipalities, allowing towns and villages to get on with the task of designing their 2005 budgets.

On December 2, the cabinet approved a directive establishing the distribution of income tax revenue worth Sk31 billion (€775 million).

As a result of budget decentralisation, municipalities and regional governments are entitled to a direct proportion of state income taxes to fund their budgets.

According to the daily Pravda, the cabinet-approved directive gives towns and villages Sk23.5 billion (€578 million) of income tax revenue. Regional authorities will get Sk7.9 billion (€197 million). The cabinet will keep 6 percent.

The ruling Hungarian Coalition Party's cabinet ministers refrained from voting on the directive, as the party insisted that municipalities be guaranteed 95 percent of their 2004 budgets.

The Finance Ministry, however, agreed with the Association of Towns and Villages (ZMOS) that 2005 budgets should be guaranteed at 87 percent of 2004 levels.

The Finance Ministry and the ZMOS conducted marathon negotiations to come up with a draft directive that was suitable to all parties. The Slovak Spectator spoke to the head of the ZMOS, Michal Sýkora, about the difficulties of fair distribution, and his hopes for decentralisation in the future.

The Slovak Spectator spoke to the head of ZMOS, Michal Sýkora, about the difficulties of fair distribution and his hopes for decentralisation in the future.


The Slovak Spectator (TSS): Is the ZMOS happy with the cabinet draft that defines how income taxes would be distributed to municipalities?

Michal Sýkora (MS):After numerous negotiations with the Finance Ministry as well as the Education and Social Affairs Ministries, we managed to push our agendas closer. While we have not reached a full accord, we managed to reach the maximum possible compromise.

I consider it a fundamental turn that our partners finally abandoned their original plan, which would have meant less finances for more than 2,600 municipalities with less than 5,000 citizens, even though the size of their constituencies would have remained the same. It was fundamentally unacceptable for us.


TSS: Could the current cabinet draft directive endanger certain categories of municipalities in Slovakia?

MS: Absolutely not. The cabinet draft directive defines the distribution of Sk23.5 billion €578 million). The distribution criteria include the number of inhabitants, geographical location, altitude, size and its constituency. To press all of this into a mathematical formula was very demanding. It was simply impossible to define the mechanism in a way so that nobody got hurt.

The only category of municipalities that will have less finances than in 2004 are those villages with fewer than 250 inhabitants - approximately five towns. But even these villages will not see their existence seriously threatened.

We are also continuing to negotiate over easing the impacts of fiscal decentralisation. The Finance Minister tentatively agreed to cover deficits from decentralisation with reserves from the state budget.


TSS: Larger cities have already protested against the directive. What impact will fiscal decentralisation have on larger cities?

MS: We have acknowledged their protests and defended their interests. In fact, the "impacts" that are the subject of complaint are non-existent. What decentralisation means for big cities is that they will get more finances than previously, but not as much as they demanded.

The first proposal [that has since been amended] would have considerably worsened the situation of 2,600 municipalities and significantly improved the situation of larger cities.

The Finance Ministry rectified this injustice by making adjustments for certain categories of municipalities. Larger cities do not like the change, but I restate that they will get more money in 2005 than in 2004.

The ZMOS managed to push through some Sk100 million (€2.5 million) in additional finances for Bratislava from the same resource as for small municipalities.


TSS: How do you see the process of fiscal decentralisation progressing? What are the biggest shortcomings of the process?

MS: While we have not reached the end of the process, we have made great progress. Next year, our fair distribution estimates will be tested and we will see just how realistic our plans were. Once passed, the cabinet directive will be transformed into a law within one year.

In the future, we will have to be careful not to allow under outside influences to reduce income tax rates. Towns and villages are now dependent on this income. While the income belongs to towns and villages, however, it is the state that decides on tax volumes, so we have to be cautious.

I think the greatest shortcoming is the time pressure we have under. Waiting for the cabinet to approve a distribution mechanism means that towns and villages will have to scramble to approve their local budgets by December 15.

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