Local governments would not rush into local taxes

Rural landscape.
Rural landscape. Source: ERR

Sides to the nascent coalition are discussing allowing local governments to lay down local taxes and hike land tax beyond recent agreements. Local government heads would welcome the freedom but aren't rushing to devise new taxes.

Representatives of sides to coalition talks said Wednesday that the financial autonomy of local governments needs to grow one way or another. In other words, local governments need more money the use of which they can decide for themselves.

Veiko Luhalaid, executive director of the Association of Estonian Cities and Rural Municipalities, agrees and remarked that almost all European local governments have more financial freedom than cities and municipalities in Estonia.

"All of our local government tasks rely on the state budget, and local governments virtually cannot generate own income to finance things approved by the local community," Luhalaid noted.

He added that local taxes help ensure financial autonomy in other countries. "There are real estate taxes, those associated with pollution or vehicles, legacy duties."

The Reform Party's Mart Võrklaev also said local government could have more say in matters of taxation. "Land tax is one possibility," he suggested, adding that land valuation as a precondition for hiking the land tax rate has already been carried out.

"Indeed, there are restrictions currently in place keeping local governments from making their own decisions. We are discussing giving local governments freer hands," Võrklaev said.

The law currently only allows local governments to hike land tax by 10 percent annually. Head of the Social Democratic Party (SDE) Lauri Läänemets believes the limitation should be relaxed.

"There is also the question of whether the tax exemption for land under residential property should be a state-level measure or perhaps it could come from the local government," Läänemets suggested, adding that SDE is not looking to hike the land tax but give local authorities more freedom.

Local governments in no rush to hike land tax

Heads of Estonia's local governments say that more freedom would be welcome but do not see local taxes as a magic wand. Järva Municipality Mayor Toomas Tammik said that hiking the land tax by 10 percent would yield €62,000 for the local government's over €20-million budget.

"The land tax issue rather puts pressure on farmers and forest owners, groups that create jobs in our area," Tammik said. "But if businesses understand the purpose of the hike, they might just agree."

Saaremaa Municipality Mayor Mikk Tuisk said he would not rush to hike land tax beyond what is planned.

"We know what a 10-percent hike would entail. But 20 percent, for example, would require additional analysis in terms of impact on people," he said, adding that tax hikes should also serve a specific goal.

Both Läänemets and Võrklaev highlighted the idea of allowing local governments to lay down new taxes, giving the example of a tourism tax, which could appeal to the Western Estonian islands.

Mikk Tuisk said that while he is in favor of the idea in principle, the tax would require local debate. "Laying down a new tax would need to be justified. In any case, revenue should reach tourism or at least help pay for associated expenses," the municipality mayor said.

Eesti 200 would give local governments part of dividend income tax receipt

Eesti 200 negotiator Margus Tsahkna said that the coalition talks will return to the subject of taxes towards the end.

"The subject matter of property taxes has been part of all coalition negotiations in which I have been involved if memory serves," Tsahkna said. "It needs to be discussed from the point of view of it not hurting ordinary people. It cannot serve as a way to boost local governments' tax base to any considerable degree."

But Eesti 200 have proposed giving local governments a part of income tax revenue on dividends. "To make sure local governments are motivated to promote local business," Tsahkna explained.

Tammik and Tuisk said that local governments are making constant efforts to attract businesses. "We are already doing everything we can to develop local businesses as they employ local people," Tuisk said.

He added that he is in favor of the plan if the summary tax burden of entrepreneurs remains unchanged, with a part of the money coming the way of local governments. Tammik also said the plan is worth discussing, giving the example of an industrial area in Imavere to which people commute from outside the municipality.

"Local people have made concessions in terms of their living environment, while tax revenue is subpar because a lot of people commute to work from neighboring municipalities," the Järva Municipality mayor said.

Veiko Luhalaid remained more skeptical, suggesting that such a change would undoubtedly come with new obligations. "I would not be too optimistic about local governments getting to decide the use of new revenue."

Luhalaid said that if money or opportunities to generate revenue come with new local government tasks, we are not talking about financial autonomy.

Margus Tsahkna said he would not saddle local governments with additional tasks. On the contrary – existing tasks should be critically reviewed. "Because local governments often have obligations that their meager revenue base just cannot support. Especially when it comes to social welfare and healthcare," the politician said.


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Editor: Marcus Turovski

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