Paper/Speech Details of Conference Program for the 19th NISPAcee Annual Conference Program Overview Fiscal Policy Author(s) Viktor Trasberg University of Tartu Tartu Estonia Title Developments of fiscal autonomy in Estonia: Income tax change File Paper files are available only for conference participants, please login first. Presenter Abstract During the last 15 years, in Estonia has been intensively discussed over a territorial-administrative reform. The main purpose of the reform is focused on sub-national governments’ size optimization and their fiscal viability. Nevertheless, progress still now has been rather slow. Important reform issue has been also fiscal relations optimality between central and local governments and local tax autonomy. The focus has been to widen local governments’ fiscal autonomy by transferring to municipalities more functions as well tax revenues. However, recently local tax autonomy received a backlash, when the Parliament abolished from the list of local taxes sales tax and boat tax. Despite revenues from those taxes were relatively limited, the symbolic outcome hardly copes with principles of European Charter of Local governments. The main tax income source for the sub-national governments in Estonia is personal income tax (PIT), which is shared between central and local governments. Until 2003, the PIT revenue was distributed on the basis of total revenue collected - 56% in favor of local governments and remains was channeled to the state budget. From 2004, a principally new system of PIT sharing was adopted – the local governments now receive fixed amount of gross PIT revenue (11.4%). As a result, the local governments share has been steadily growing and currently, about 75% of total PIT revenues are received by sub-national level. Therefore it is inevitable to study the impact of such a change to municipalities’ from the point of fiscal situation perspectives. The research of the paper concentrates on the analyses of PIT income revenue fluctuations across the local governments and the new system impact on various sub-national government groups. The groups are characterized by their income level, size, territorial location and other factors. There will be used correlation and econometric analysis to bring out main aspects of PIT sharing system change. There is available a complete dataset for municipalities fiscal activities, including budget revenue structure and population characteristics. As expected, there are short-run and long term-effects of system change. Immediate outcome after the new system became effective was fast growth of municipalities’ tax revenue flows and equalization of revenue levels per capita. However, in the long run in more favorable situation are the municipalities with higher general personal income levels and large share of PIT revenues in total revenues. The research brings out various municipalities revenue structure and impact of PIT sharing system change to their fiscal position. Additionally will be generalized municipalities fiscal situation during the different stages of business cycle – from boom to sharp downturn during the recent decade. Particularly are focused on municipalities’ revenue fluctuations during the recent economic recession. As the central government annually is changing the proportion, in which the PIT will be shared between levels of governments, the municipalities’ tax revenue situation is rather uncertain.
