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Mayors: Government to offset by state budget money municipalities’ losses following tax measures

de Mariana Bechir , 12.11.2017

Mayors accepted on Tuesday in the negotiations with Prime Minister Mihai Tudose and several cabinet members, the promises made by the government officials to partially cover the losses caused by the income tax cut.

The PSD-ALDE coalition has surmounted the only obstacle it has considered (we recall that it ignored the employer associations and trade unions), and the draft on amending the Tax Code will be approved in the government meeting on Wednesday.

At the last meeting on Tuesday morning, the AMR delegation included, among others, Gabriela Firea, Gheorghe Falca, Ilie Bolojan and Robert Negoita – and the PSD leader, Liviu Dragnea, was also present at the talks and gave mayors the verbal guarantee to keep the promises.

Besides the promises, the mayors have accepted concrete measures that will only cover a very small part of the losses that local budgets will register because of the income tax cut to 10%.

Effects of reducing income tax from 16 to 10%

The biggest impact of this decrease will be recorded in the 22 cities that produce more than 60% of Romania’s GDP and will see the amounts for their investment significantly cut – Cluj, for example, will lose EUR 26 million next year.

Situation in other cities:

  • Arad – EUR 16 million
  • Craiova – EUR 11 million
  • Constanta – EUR 16 million
  • Iasi – EUR 15 million

What mayors demanded

The mayors presented a clear claim at the meeting: an increase to 60% (of the amounts collected from the income tax) of the share allocated to local authorities.

The state budget now retains 30% of the income taxes, and 70% of them are returned to local administrations, according to the Law 273 on local public finance, as follows:

  • 75% allocated to local budgets of communes, towns and municipalities on whose territory the income taxpayers operate;
  • 25% to the local budget of the county;
  • 5% to a separate account, for balancing the local budgets of communes, towns and municipalities, as well as the local budget of the county.

What Government promised: financial compensation per inhabitant

The share of 41.75% will increase in 2018 to 43%, not to 60%, as mayors required on Tuesday. We recall that mayors asked on Monday for abandoning the intention to cut the income tax.

However, the Government pledged to allocate in 2018 amounts from the state budget as compensations for partially covering the losses (at least up to the amount which they obtained this year from the total income tax collected locally).

The exact effects of the income tax cut will only be known six months after its introduction, therefore the compensations will be discussed in the first half of the year and possibly approved at the first budget amendment next year.

Also, mayors have been promised that a new distribution formula for the shares of the collected income tax and a clear scheme for compensating the gaps will be established next year.

The government officials promised that the compensation will be made by establishing a minimum threshold of 750 lei per inhabitant in cities and 500 lei in communes, to be ensured, when local authorities’ revenues do not reach these amounts, by budget balancing, with amounts broken down from the VAT or other sources.

A measure forgotten during governing process

At the beginning of the PSD-ALDE government, officials announced that as of January 1, 2018, the income tax revenues will go directly and entirely to local administrations (mayor’s offices, county councils).

The statement made in March by former Minister of Regional Development, Public Administration and European Funds (MDRAPFE), Sevil Shhaideh:

“According to the government program, in the field of financing local authorities, we are working at this moment on amending the Law 273 on local public finance and as of January 1, 2018, the income tax will become a source of local budgets.

In the case that the mechanisms available to the mayor or the president of the county council will fail to collect the amounts from this source, we shall receive support from ANAF, but the amounts will be transferred exclusively to local budgets.

This is the first major amendment that we shall make to the Law on public finance,” said Sevil Shhaideh.

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