The government introduced the new levy this year, one of the last countries in Europe to do so.

The pledge was written into the newly completed coalition agreement by Reform and Eesti 200, released on Saturday. It aims to ease the financial burden for families with children under 18. 

It is not known how much money the tax cut will cost the state. Annual car tax rates vary depending on the vehicle. 

The government said money generated from the tax will be reinvested in Estonia's road infrastructure, which suffers from a funding gap.

Prime Minister Kristen Michal (Reform) said the proposal will be submitted to the Riigikogu in the fall, but families can expect the benefit to take effect this year. He also confirmed it will be a €100 reduction per child each year.

Michal said setting the discount at a fixed amount is likely the simplest approach. "The car tax has been somewhat flawed from the start. Our goal is to reduce the unfair burden on people with disabilities and families with children," he said.

If a family's car tax bill is less than €100, the discount would effectively exempt them from paying it altogether, no minimum payment would be required.

The policy is not expected to significantly increase bureaucracy, the prime minister said.

"The simpler and more digital the process is for people, the better," he said, adding that by the second year, the system should function as smoothly as filing a tax return.

The Ministry of Finance will begin calculating the cost of the discount this week. The state had expected to raise €99 million in revenue from the car tax this year, based on the latest forecast.

The government also intends to harmonize the tax rates for cars and minibuses, so that taxation of adapted vehicles and minibuses used by large families will no longer depend on their registration category.

PM: Families will get discount this year

Asked why the state is specifically supporting car owners with children, Michal said this group needs to travel more frequently and requires greater mobility.

"This is about alleviating the impact of the tax on those who actually pay it—people who own cars—and among them, especially those with children," he said.

In the case of blended families, where children may need to be transported by parents living separately, the discount can be claimed by one parent only.

"This is similar to how tax deductions have worked in the past—only one parent can claim it," he explained.

Michal said the measure was a joint proposal within the coalition. "It's a shared principle between the two parties to support families with children and people with disabilities."

Exactly how it will function depends on the Ministry of Finance, which is expected to take about two months to develop the measure.

The Riigikogu, which reconvenes in September after the summer break, will then decide on the proposal.

Whether this means partial refunds for taxes already paid this year or discounts applied to next year's tax bill is up to the Ministry of Finance to determine. "But families can count on getting €100 off their annual car tax per child already this year," Michal confirmed.

Recent tax changes

In recent months, calls to reduce the VAT rate – for which Estonia has no exemptions – have been shot down by the Minister of Finance Jürgen Ligi (Reform) as a "cynical" measure at a bad time for the economy.

The VAT rate will rise from 22 percent to 24 percent on July 1. The vast majority of countries in Europe reduce the VAT rate on food and essential items.  

Earlier this month, the temporary defense tax, which was supposed to be paid for by all members of society, was changed to remove a future 2 percent tax on corporate income tax and income tax from the first euro. Ligi said it would cost too much to implement.

The coalition agreement will remain in effect for the next two years. Estonia's local elections take place in October. 

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