Financing Local Governments in Estonia
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University of Tartu, Chair of Economic Theory, professor
The opportunities of the system of local government financing currently used in Estonia have been exhausted.
The large differences in local government revenue and growth of the tax-free minimum that are the inevitable result require rapid and full reform of the current system. The problem of the weakness of the revenue base of local governments will not be solved by leaving them an even bigger share of the individual income tax. Even raising that share to 100% would leave the revenue base for most local governments weak at the same time that the gap between the revenues of richer and poorer local governments would grow significantly. A system based on real estate taxation and corporate income is used in Europe to provide stable funding for local governments. Neither of these can be used in Estonia. This again raises the issue of standardizing the principle of cost and revenue orientation in the funding of local governments. There is unfortunately no theoretical research in this field that is based on the situation of Eastern European countries.