"Income tax and other changes should be aimed at dialing back fiscal centrism, while the bill simply redistributes local government resources instead of providing any more. The finances of some already struggling local governments are looking to take a hit," Mayor Klaas wrote in a letter to Minister of Regional Affairs Madis Kallas.

Klaas, who is a member of the ruling Reform Party's board, said that introducing a less favorable local government funding system would leave Tartu with insufficient resources for performing local government tasks.

"Hiking the VAT rate by two percentage points alone creates additional expenses. The annual effect for Tartu would be over €1.2 million. At the same time, the proposed income tax change would see revenue fall by €1 million. Inflation would see the total net result deteriorate further in Tartu and other local governments."

The mayor added that Tartu was the hardest hit when benefits for foster families were hiked, while it would also be among the most affected municipalities after planned income tax changes.

"This would see various negative consequences cumulate. Loan contracts between the City of Tartu and the EIB and NIB include a clause according to which the city's total net gain must be at least 1.5 times what it costs to service loans. The reduction of the total net gain as a result of unforeseeable legislative changes would make it impossible to comply with this clause and could lead to much higher financing costs."

In summary, Klaas found that proposals to amend will not solve the underlying problems in local government financing.

"We cannot agree with the explanatory memo's presumption that the amendments' fiscal effect is negligible. Effects should not be evaluated based on superficial presuppositions. Thorough analysis is needed to gauge the true effects of changes, while keeping in mind the difficult fiscal situations of local governments today. Even seemingly small changes in financing, coupled with additional tasks (for which insufficient additional funding is provided), can cause total net gain to turn into loss."

Two proposals from Tartu: urban sprawl and public transport parameters

For Tartu to be able to approve the income tax changes, the equalization fund equation should see two major changes.

First would be an urban sprawl parameter. This would make it possible to better gauge calculated costs by taking into account people's jobs in addition to place of residence.

"It is widely known that local governments offer public services also to people who are not registered as residents there (public roads, green areas, street lighting, public transport etc.). It has been calculated that non-residence-based services require €120 million most of which is tied to work-related consumption. There are nearly 100,000 people who spend around half of their working days in another local government's territory, while this is currently not accounted for in local expenses calculations. Many local governments have many more registered jobs than residents, while it is the other way around for others."

Klaas finds that adding an urban sprawl component would make it possible to more accurately measure (calculated) costs, taking into account people who spend a lot of time in a local government's territory but are not registered as residents.

Secondly, a public transport parameter should be added. Urmas Klaas said that what local governments spend on public transport differs to a great degree, while these differences are not reflected in the calculated costs of local governments in the equalization fund. Public transport is among the biggest expenses for some local governments, the Tartu mayor explained.

Urmas Klaas ran in the 2023 parliamentary elections, taking 8,065 votes, but decided not to join the Riigikogu to continue as mayor.

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