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Richer municipalities skeptical about ministry's tax revenue redistribution plans

Minister of Regional Affairs Madis Kallas (SDE).
Minister of Regional Affairs Madis Kallas (SDE). Source: Priit Mürk/ERR

Some wealthier municipalities in Estonia say they wish to invest more, due to rising populations, and so are lukewarm about a Ministry of Regional Affairs plan to reform the tax system as it relates to local government areas.

The corresponding bill, which the ministry says will redistribute funds more equitably between richer and poorer municipalities, could become law this year, leaving three years for the transition.

ETV news show "Aktuaalne kaamera" (AK) reported that one of the biggest losers from the reform is Kiili, near Tallinn.

As part of the Tallinn commuter belt the municipality has a large population of families, meaning investments there often relate to schoolchildren.

The municipality will be out-of-pocket to the tune of around €730,000 per year under the new system, AK reported.

 Kiili's mayor, Aimur Liiva (Kiili Külade Ühendus electoral alliance), told AK that: "If you really want to introduce this change in this format, you should state very realistically and clearly where the deficit that we will have in fulfilling our obligations will be covered."

"It cannot be such an abstract proposition as a corporate income tax or a 'boat tax' or a tax on whatever. It must certainly cover this issue as well," the mayor went on.

On the other hand, Saaremaa would see its revenue base rise by €2 million by 2027.

Following the administrative reform, the municipality feels that the redistribution of revenues will be needed.

Deputy Mayor Liis Lepik said that due to various changes in the past six years, the current revenue base does not suffice.

"In other words, it actually demonstrates that this income base is not sustainable and is very inclined towards the so-called working-age population, which tends to be concentrated in the larger centers," she went on.

Tallinn stands to lose the most if the planned changes go through - €20 million, while Narva stands to gain most, at €4.5 million.

Regional Affairs Minister Madis Kallas noted that the half-dozen or so richest municipalities do not support the change, and would prefer the additional funding to derive from the state budget.

"But the remaining [municipalities] of course support it," Kallas told AK.

Hitherto, local governments only tax revenue source has derived from personal income tax, but from this year, income tax on pensions has also contributed, to a small extent.

The new, planned system will gradually equalize these sources, which will have the effect of taking money away from the richer municipalities to the benefit of the poorer ones.

Minister Kallas said that under the current legislation, the division is "2.5 percent of pension income tax and 11.89 percent of personal income tax.

"We plan to organize the system so that at some point there will be 10.5 percent coming from both pension income tax and personal income tax," the minister went on.

The regional affairs ministry is to present feedback on the planned reforms and from the municipalities, over the next week, AK reported.

Madis Kallas, a former Saaremaa mayor, wrote earlier this week that fixed tax revenues would guarantee stable income, growth and greater financial autonomy, and would help to resolve what he says is a disproportionate focus on Tallinn and other larger towns in Estonia.

Following the 2017 local government boundary reforms, Estonia has 79 municipalities across two categories, rural (Vald) and urban (Linn).

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Editor: Andrew Whyte

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