Government amends plan for redistribution of local government revenues

Madis Kallas.
Madis Kallas. Source: Raigo Pajula/Office of the President

On Thursday, the government deliberated the draft Income Tax Act presented by Minister of Regional Affairs Madis Kallas (SDE) and modified the original allocation principles for income tax to local governments.

Kallas said that the government revised the proposed income tax rates after receiving feedback from every party involved.

The transfer from income tax to the equalization fund has decreased by 25 percent: from €11.1 million to €8.2 million.

In addition, the income tax rate on state pensions was reduced from 3 percent to 2.5 percent, while the income tax rate on all other income increased from 11.78 percent to 11.89 percent.

According to the amendment, local government income tax receipts from state pensions will increase by €16.3 million, while income tax receipts from other sources will decrease by €24.7 million. The remaining disparity will be transferred to the fund for equalization.

"The modifications are necessary to assist municipalities in a dire economic circumstance. The funds that will be added to the state budget in 2024 cannot be used to increase the revenue base of local governments due to the exceedingly precarious state of public finances. There are plans to increase the equalization fund, but this will be accomplished through a revenue redistribution," he said, adding that the only option available at this time is for wealthy municipalities to lend a hand to more disadvantaged ones.

After endorsing Kallas' plan, the goverment voted to send it to the Riigikogu for discussion.

"We plan to continue discussions with local authorities in the form of several working groups from June until the end of the year, both in terms of the number of kindergarten places and the resulting pressure on the municipalities of Harju and Tartu," he said.

Kallas also emphasized that solutions will be developed for situations in which rural schools, libraries and community centers are unable to remain open. This is the first step toward alleviating the condition of the communities who are currently experiencing the most difficulty, he said.

"In accordance with the government coalition's agreement, we will continue to pursue comprehensive and long-term solutions for all local governments. We expect to begin implementing more substantial and systematic reforms in 2025, and we will have more time to plan for their execution," the minister said.


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Editor: Aleksander Krjukov, Kristina Kersa

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