The Saue municipal council challenged the income tax law amendments passed by the Riigikogu on July 29 last year, arguing they were unconstitutional. According to projections, Saue is among 14 municipalities whose revenue growth is expected to slow slightly as a result of the changes.

Saue Municipality believes it is unjustified to address the problems of lower-income municipalities at the expense of rapidly growing ones. Among other concerns, Saue argues that the additional costs associated with population growth — such as building new schools and kindergartens — should also be taken into account.

In its decision published Monday, the Supreme Court found that the amendment helps the state fulfill its constitutional obligation to ensure a more balanced financial capacity among cities and municipalities, as well as to provide public services throughout Estonia. If a local government is unable to offer even the most basic services, it could lead to violations of residents' fundamental rights.

Over the past 20 years, the population outside Harju and Tartu counties has declined by nearly one-fifth. Young people and higher-paying jobs have become concentrated primarily in Tallinn and its surrounding areas. This has led to significant disparities in local governments' per capita revenues. A shrinking population also places pressure on municipal budgets due to higher per-unit service costs.

The Supreme Court noted in its decision that the outmigration of working-age residents from peripheral areas — and the resulting decline in tax revenue — is a structural issue that municipalities cannot resolve through governance decisions or increased efficiency alone. Although people have the right to freely choose where to live and work, this does not impose an obligation on the state to encourage job concentration in growth centers or urban sprawl, especially if it comes at the expense of other municipalities' development and tax base.

Likewise, a municipality is not obligated to endlessly encourage population growth if doing so entails unsustainable expenses. Municipalities can influence the pace of growth, for example, through zoning and planning decisions. Still, Saue itself has argued that, in the long term, its rapid population growth is actually beneficial to the municipality's financial capacity.

The court also acknowledged that the state's spending needs have significantly increased due to the current security and economic environment, and that the Constitution does not require prioritizing the needs of local governments. A municipality has no right to assume that a previously achieved level of funding can never be reduced.

Municipalities get to keep enough money

In its ruling, the Supreme Court conducted a thorough assessment of Saue Municipality's revenue adequacy. In 2024, the level of most public services in Saue was clearly above the Estonian average and the municipality's financial situation was significantly better than that of most other local governments.

According to projections, the municipality will receive up to 3 percent less income tax revenue compared with the scenario in which the law had not changed. The Supreme Court concluded that this reduction is unlikely to prevent the municipality from fulfilling its mandatory functions and, at least to a minimal extent, its discretionary functions as well. Nor would the quality of these services fall below the national average. "Among other things, it should be taken into account that due to declining birth rates, the demand for new kindergarten and school places is likely to decrease in the near future," the court added.

In conclusion, the Supreme Court acknowledged that the legislative amendment does indeed infringe upon Saue's right to self-governance and financial stability, as it may necessitate revising the budget, development plans and investment strategies or seeking additional revenue sources. However, the court found that this infringement is not excessive, given the amendment's purpose and the extent of its impact.

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