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Mihhail Kõlvart: Redistributing revenues will not improve local authorities' lives

Mihhail Kõlvart.
Mihhail Kõlvart. Source: Ken Mürk/ERR

With regional policy in decline for a couple of decades, local authorities expect more from the state when it comes to changes in the funding of cities and municipalities than simply redistributing revenue from one place to another, writes Center Party leader Mihhail Kõlvart.

Minister of Regional Affairs Madis Kallas (SDE) justifies the proposed reorganization of the local government tax system by the need to ensure better quality public services.

At the local level, the main purpose of public services is to support people's daily lives and well-being. The services provided include social assistance, housing and public utilities, public transport, road and street maintenance, waste management, and the maintenance of nursery schools, libraries, community centers, shelters, care homes and other local institutions. In addition, municipalities have to organize other aspects of local life, which the state has made them responsible for.

Providing all these public services requires resources and, unfortunately, municipalities and cities have suffered from a constant lack of resources for years and have been looking for ways to save money. Municipal budgets have come under increasing pressure from shrinking revenues and rapid inflation, which has led to cuts in the networks of educational and cultural institutions, as well as other services.

The state's plan to simply redistribute the revenue base will not save local governments from serious financial difficulties, nor will it make them richer, because the reform is not going to result in the state contributing a single cent more to increase the revenue base of local governments. On the contrary, with tax reforms and additional obligations, it is a case of giving with one hand, while at the same time taking away with the other, and often even more than it gives.

Some municipalities may find a solution to their urgent problems, but VAT and energy price rises, and increases in teachers' and support workers' salaries, eat up the extra resources. For example,  Võru Municipality will receive an additional €200,000 in redistribution funds this year, but VAT alone will take €140,106 from the municipality, while the cost of raising teachers' salaries will be €215,046 and the cost of the general care reform €339,203.

The city of Võru will receive an additional €100,000 from the redistribution funds, but the increase in the VAT costs will take away €183 489, so the increase in the VAT cost alone will take away twice as much from the City of Võru's budget as the city will receive from the redistribution. Unfortunately, this is the pattern of the reform.

Of course, the quality of services will not improve for the 'wealthier' municipalities that share their revenue, because cutting revenue means cutting investment. Redistribution will result in a reduction in revenue mainly for those municipalities which, because of their growing populations, will have to invest more to build and develop additional infrastructure for education and social services.

In addition, all municipalities, regardless of their size, will have to take into account the additional responsibilities of the state, however, not enough funds will be provided for this. In the same way that municipalities have not been allocated sufficient resources to implement the universal healthcare reform.

The state's desire to reduce regional disparities in the revenue bases of local authorities is a good initiative, but redistributing revenue will not solve their problems. It does less still to guarantee or help improve the quality of public services and therefore the quality of people's lives. On the contrary.

Reducing the personal income tax rate for local governments will also reduce their ability and capacity to deliver revenue in the long term. This will hamper the growth of the revenue base for municipalities after the end of the crisis and also reduce their development opportunities, borrowing capacity and investment possibilities. It is precisely because of this that municipalities have attracted the attention of the state and proposed raising the personal income tax rate, which has a faster impact on the municipal budget revenue base than tax revenue from other sources, including pensions and corporate income tax.

Local authorities need additional support from the state, not the transfer of money from one pocket to another. In order to ensure that people in Estonia can live in the same good and safe conditions everywhere in the country, we need to start by standardizing local government services.

To ensure the sustainability of life in rural areas and to maintain the vitality of the communities there, the state must guarantee public services, and in the case of small municipalities this can only be achieved through direct subsidies. Otherwise, life in these municipalities will fade away, as young families leave, and regional businesses and jobs disappear.

However, the state's aim has to be to ensure that all people have access to public services and that they are of a high quality, regardless of whether they live in rural or urban areas.

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Editor: Michael Cole

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