No. 22




Ensuring the Financial Autonomy of Estonian Municipalities *

15 December 2010


RiTo No. 22, 2010

  • Janno Reiljan

    Professor of Economics, University of Tartu

  • Kadi Timpmann

    Kadi Timpmann

    Assistant of Public Sector Economics, University of Tartu

This article intends to evaluate the extent of revenue autonomy of local governments in Estonia and to offer opportunities to increase it. In order to effectively perform the duties assigned to them by law, local governments need to have adequate revenues. The authority which local governments have in determining the level and structure of their expenditures is highly dependent on the nature of their revenue sources. Revenue autonomy and accountability of local governments are best guaranteed through municipalities’ own revenues, i.e. local taxes, user charges and revenues from local property.

According to theory, property tax is the most suitable local tax. However, revenues from property tax and from user charges are rarely large enough to cover the expenditure needs of municipalities. Therefore, it may be necessary to grant local governments access to some broadly based taxes. In terms of administrative and tax export avoidance considerations, the best option would be to let local governments set a fixed rate surcharge on top of the central personal income tax.

In Estonia, municipal own revenues are comprised of land tax, local taxes, revenues from the sale of goods and services and revenues from assets (except revenues from non-produced fixed assets). These own revenue sources constitute only 15% of total revenues in Estonian municipalities on average. Hence, Estonian municipalities are almost fully dependent on central government transfers in the form of shared taxes or grants.

The easiest way to increase municipal own revenues in Estonia is to replace the current system of income tax sharing by a system of local surcharges to the central personal income tax. If municipalities were allowed to gain the same amount of revenues from setting surcharges as they get from tax sharing at present, then the share of own resources of Estonian municipalities would increase to more than half of their total revenues on average.

*Peer-reviewed research paper.

Full article in Estonian