Regional affairs minister wants share of corporate tax for municipalities

Madis Kallas.
Madis Kallas. Source: Priit Mürk/ERR

Estonian Minister of Regional Affairs Madis Kallas (SDE) said, that he wants distribute money from wealthier municipalities to poorer ones, and in return provide subsidies to richer ones to build kindergartens. At the same time, Kallas backs the idea of giving municipalities a share of the corporate income tax.

Before its summer break, the Riigikogu made changes to the way local governments are funded. The changes mean that municipalities with higher numbers of pensioners receive slightly more in state funds than before, while other municipalities will receive less. Municipalities and cities, which benefited from the changes, said they would receive a tiny amount of additional funding, while others complained they would be unfairly deprived. Following lengthy disputes, €10 million in funding was eventually reallocated.

Minister of Regional Affairs Madis Kallas (SDE) wants the next package of changes, which will come into force in 2025, to have an even bigger impact.

"In many regions, there are so few people of working age left, that with the existing model and also with the equalization fund, they are still unable to provide all the services to the standard we would like. Wherever there is more tax revenue, that same tax revenue must also be used to help sustain those regions where there is less of it," Kallas told ERR.

The minister hopes to propose a more precise formula for the redistribution of funds by the end of September. However, last week, when Kallas met with representatives of the municipalities, there were also a few signs of discontent. Veikko Luhalaid, chair of the Association of Estonian Cities and Municipalities, said that municipalities where people tend to relocate to are not particularly happy to support those from which more people move away.

"I'm afraid there's a limit here already. On the basis of certain budget figures they are wealthier, but the challenges they face in the long term are much greater than those of municipalities with declining populations," said Luhalaid.

Regional affairs minister Kallas also promised to address this issue. To counterbalance the reduction in overall funding, Kallis said, he would offer support to growing municipalities in order for them to create more places in local kindergartens.

Kallas said he backed the idea of giving municipalities a share of corporate income tax. The share would depend on the number of jobs company's provide.

"Every day, a lot of local authorities are dealing with the issue of how to get businesses on their territory to provide jobs. And then it turns out that companies employ people from a neighboring municipality, so the municipality on whose territory the company is located receives essentially €0," Kallas explained.

Veikko Luhalaid. Source: Sergei Stepanov/ERR

The Association of Estonian Cities and Municipalities has discussed the fact that if municipalities were to receive even ten percent of the corporate income tax, it would mean over €60 million in additional funds per year.

In the meantime, there has also been talk of reforming the environmental tax so that local councils could have a say. However, Madis Kallas said that the size of the tax would probably remain a matter to be determined by the state.

"But the fact that a larger percentage of it could go to the region is what the local authorities want and what I personally see is, that this could be an alternative in order to better compensate for the disruptions," the minister said.

According to Kallas, the majority of funds levied via the environmental tax could remain in the regions.

Kallas believes real estate developers should also contribute to the development of municipalities. "If real estate developers, for example, want to build a complex of apartment buildings in the area, they should be obliged to contribute, not only to roads and street lighting, but also to investment in kindergarten and school places."

Municipalities would also gain extra income from additional taxes. When it comes to the abolition of the ten percent limit on land tax increases and on giving local councils the power to make decisions regarding tax exemptions for residential land, the state and municipalities are generally in agreement.

"There have been no major disputes about this," Luhalaid said.

The new taxes, however, are more complicated. Although the ministry is discussing the possibility of both a tourism tax and congestion tax, Kallas pointed out that municipalities may not get a free hand when it comes to their implementation.

"It's not very easy for local authorities, when the state gives you the possibility, but then also says you don't have to impose these taxes. And then it says the opposite, that if you don't have the resources, impose [them]. This kind of refusal to collect revenue for local authorities is not ethical either," Kallas said.

More serious discussions between municipalities and the ministry are still to come. Luhalaid said, that for many of the proposals put forward by the ministry, the devil is in the detail, and it remains to be seen whether the municipalities will eventually receive any extra money, or if those additional euros will simply be taken from elsewhere.

At the moment, Luhalaid is pessimistic and does not believe the state will be sending large amounts of money to municipalities in the near future. "If we are talking about the short term, it is more likely that we will have to fight to ensure that funds are not taken," he said.


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Editor: Michael Cole

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