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Changes proposed in local government revenue sources

THE FINANCE Ministry has prescribed a financial vaccination for local and regional government against what it calls ‘the Greek path’, with Finance Minister Ivan Mikloš arguing that in challenging economic times all recipients of public finances, local governments included, should start tightening their belts. According to the ministry, this should involve a change in the tax mix – the range of sources from which local government derives its funding – but the idea has failed to impress municipalities and has provoked criticism from the main opposition party.

THE FINANCE Ministry has prescribed a financial vaccination for local and regional government against what it calls ‘the Greek path’, with Finance Minister Ivan Mikloš arguing that in challenging economic times all recipients of public finances, local governments included, should start tightening their belts. According to the ministry, this should involve a change in the tax mix – the range of sources from which local government derives its funding – but the idea has failed to impress municipalities and has provoked criticism from the main opposition party.

The Finance Ministry proposes that local governments no longer be financed entirely from personal income tax revenues, but instead from a mix of taxes: personal income tax, corporate income tax, value added tax and excise taxes. However, the recent developments resulting in the fall of the government on October 11 mean the changes are now unlikely to be passed by parliament before an early election due in March.

The Association of Towns and Villages (ZMOS), which represents 96 percent of municipalities, wants to preserve the current system of financing, which is linked solely to personal income tax. ZMOS argues that revenues from this tax are justly distributed among towns, villages and regional governments.

The Union of Towns of Slovakia (ÚMS), another body that represents municipal governments, says that while it understands the macro-economic problems of the state and does not deny the need for local government to participate in their solution, it also believes that the proposed change in financing will have a negative impact on local governments, Marián Minarovič, secretary general of the ÚMS, told The Slovak Spectator.

Mikloš has defended his plan, suggesting that the scheme is much better for the municipalities themselves since they are likely to receive 3 percent more in 2012 than this year.

“The basic point of the proposal is that while currently the local governments have been getting 93.8 percent of the income tax of individuals, as of next year they would be getting 12.97 percent of all tax revenues, the so-called tax mix,” Mikloš said, as quoted by the SITA newswire. “The method of calculating tax revenues changes, yet nothing really changes in the principle of fiscal decentralisation.”

According to Mikloš, even after the change towns and villages will see, on the 18th day of the month, a sum sent to their accounts which they will then be able to spend based on the same principles that now apply. The finance minister said he understands that the municipalities want more money, but that in the light of the immense insecurity linked to economic developments in the world economy and at a time of threatening recession Mikloš says he considers three-percent year-on-year growth as appropriate, SITA reported.

In response to municipalities’ misgivings, Mikloš noted that they also protested in 2004 when then-prime minister Mikuláš Dzurinda was trying to push through the original fiscal decentralisation plan.

Some regional governments, however, say that the changes could threaten their very existence. The presidents of Banská Bystrica, Košice, Žilina and Nitra Regions – Vladimír Maňka, Zdenko Trebuľa, Juraj Blanár and Milan Belica – say that in 2012, regional governments would see €62 million less than they might expect based on the current model, SITA reported.

They argue that the move might result in increased prices at nursing homes, utilities and social services, unrepaired local roads, cancelled local buses, higher taxes on cars, and problems co-financing projects covered from European funds.

However, the ÚMS says that if a set of accompanying laws is passed, the situation could be made more acceptable for local governments.

“We negotiated to ensure that an additional law be adopted to guarantee the necessary minimum funds for the performance of the original powers of local administrations,” Minarovič told The Slovak Spectator.

Minarovič stressed that the goal is that in the event of any kind of crisis local governments are still able to fulfil their mission.

“Personal income taxes present for us a certain high degree of independence because they are set by law when the state budget is proposed, i.e. the criteria do not change,” Minarovič said, adding that this system is quite advantageous in times of positive development.

He said that this was part of the official reasoning for why the state now prefers the tax mix, made up of four different types of taxes, as well as solidarity, since at the same time as the income of the state drops, local government would also experience a fall in income. Minarovič added that some mayors and heads of local government even accept this argument.

“In the event that the new model of fiscal decentralisation is applied, we demand a cut in spending caused by legislation and at the same time an increase in the incomes of local administrations, without an impact on the state budget,” Minarovič said.

The leader of the opposition Smer party, Robert Fico, criticised the government of Iveta Radičová for what he called cutting finances for local governments.

“An extraordinarily critical situation is emerging within the municipal and regional governments,” Fico said, as quoted by SITA. “Mayors are turning to us and demanding that we prevent the adoption of measures that the government is preparing which would bankrupt local governments.”

Fico has restated that his party will not support the tax mix and argues that local governments would lose approximately €250 million in 2012, allowing the state government to use the money for its own purposes.

Smer instead proposes higher taxes, at 25 percent, for people whose annual income exceeds €33,000, along with heavier taxes on banks. The current flat tax rate on income is 19 percent. Corporations with profits exceeding €1 million might also face higher taxes, according to Fico’s proposals to direct funds to municipalities.

The total revenues of local governments in the first six months of 2011 reached €1.843 billion, representing a 3.77 percent increase year-on-year. Total spending by local governments stood at €1.599 billion, up 1.4 percent year-on-year, based on an analysis by the Slovak Credit Bureau, which operates two Slovak loan registries, SITA reported.


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