Regional Minister Madis Kallas' (SDE) plan, dubbed "Robin Hood," is taking money from rich municipalities and giving it to poorer ones.

The expense to the state would be the same. Municipalities with more wealthy citizens would receive slightly less money, while those with more retirees would receive more.

"The Reform Party certainly cannot support such a major redistribution," Erki Keldo, the party's parliamentary leader, said.

According to Madis Kallas, the change could happen gradually. Tallinn would lose €20 million in 2027, Saku €1 million, and Saue €2 million. Narva would come out on top with 4.5 million, followed by Pärnu with two million and Elva with one million.

"This redistribution would seriously jeopardize the construction of different infrastructure, kindergartens and schools in several municipalities," Keldo said, adding that the coalition had already agreed on the principles of redistribution last spring.

"We have had an agreement in the past that this part of the income tax for pensioners can be up to 4.5 percent," Keldo said.

Madis Kallas: Change must have an impact

Half of the change that was agreed upon in the spring was completed before the parliament left on summer recess, when the current 2.5 percent became into law. This meant that €8.3 million changed hands.

"The feedback from the Riigikogu was that this is a cosmetic change, it does not change regional inequalities in any way and it should be done more forcefully," the minister recalled.

He also added that the situation in the communities has gotten worse in comparison to the spring of last year.

"If we are serious about substantially reducing inequalities, let's do it in a way that has an impact on regional policy," he said, emphasizing his willingness to defend his position in the negotiations.

"I'm a realist. I am aware that we have a coalition and that there are concerns on multiple sides. And, of course, we must reach an agreement," Kallas said.

"At the same time, there are a lot of supporters from all parties and it is typically determined by the municipality's background rather than the political party.

"There are also many supporters of the proposal across all parties and it doesn't depend on the political party, but often on the municipality these people come from," he said.

Reform Party awaits drafting proposal

Mart Võrklaev, former mayor of Rae and finance minister of the Reform Party, said that a smaller redistribution had been agreed in the spring and that the wealthier municipalities also face higher costs.

"For this amendment, it is absolutely necessary to draft the bill in the way that good lawmaking requires," Võrklaev said. "Analyze the consequences, involve the municipalities thoroughly, get the questions answered and then make a decision."

Madis Kallas, on the other hand, said that cooperation with local authorities was ongoing and that he hoped to have a draft law in place as early as February.

"The development proposals have been in the pipeline for a couple of decades," the minister of regional and rural affairs said.

"I agree that changes are needed, but we need to look at things in depth, not just play with percentages and go on a gut feeling about whether the impact will be big or small," Võrklaev said. He still expects a more thorough analysis.

Both criticism and praise from local authorities

Kallas came out with the proposal in December and since then a substantial number of municipalities have sent in their feedback. "Those who have to give up their money are more likely to say it's not a good idea, and others to say it's a good idea," Kallas summarized how communities responded.

Keldo, on the other hand, said that most municipalities do not support the redistribution plan.

"We have been keen to get the full picture from the regional minister," he said.

"For example, we have a question about what services regional centers should supply, a separate concern is how municipalities would receive a social infrastructure fee," he said.

"I think that we should also look at how efficient local governments are," Võrklaev added.

"So that we don't have a situation in which we take from the wealthy, who perhaps collect more land taxes and kindergarten fees, and then there are other towns that claim we have everything for free but don't have enough money to pay teachers. Võrklaev stressed the need for uniformity in income collection to facilitate redistribution efforts.

The impact of corporate tax inclusion works against the effect of redistribution

Madis Kallas' proposal does not simply change the income tax rate on pensions. Among other things, he suggested that communities receive a portion of the corporate income tax based on where the company's offices are situated. At the same time, municipalities and cities would receive a reduction in their personal income tax burden.

"I have an impression that it will benefit wealthier regions," he said. Võrklaev recommended waiting for study and drafting for determining the final advantage. "At the moment it raises questions about whether it is necessary and sensible."

Keldo went on to say that a partial replacement of personal income tax with corporate income tax could exacerbate inequality. "Because most people still work in the same municipalities that currently have bigger budgets," he went on to say.

"To some extent, that is correct," Madis Kallas, said. "But it is a concrete measure that, on the one hand, helps those municipalities that have to give up more of their income tax and, on the other hand, it is a crucial message to all municipalities that every job that can be brought to the area is a real benefit for the municipality."

Reform also disagree on lowering the loan ceiling

Kallas' third proposal concerned the borrowing ceiling for municipalities. Prior to the pandemic, the state allowed municipalities to incur up to 60 percent debt, but during the crisis, restrictions were tightened. Kallas recommended raising the borrowing cap back to 60 percent, but not for everyone.

This is another idea that the Reform Party would rather not support, according to Keldo.

Keldo pointed out that growing communities may need to make investments right now to service their loans. "Because each municipality has a unique growth or development stage."

Võrklaev stressed the importance of controlling local government expenditures. "Local government also has an impact on the position of the state budget," he said.

Also, when developing the budget strategy, the government determined that the local government budget deficit should be decreased by €30 million by 2027.

"We also know from historical experience that when the loan-to-value ratio exceeds 60 percent, the picture begins to resemble a debt jail, from which it is difficult to get out," he said.

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