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Cronicile

Government prepares a budget revolution: Income tax to be entirely collected to local budgets

de Mariana Bechir 6.3.2017

The Government prepares amendments to several laws so that the income tax to be directly and entirely collected to the local government (municipalities, county councils) as of 1 January 2018, to finance their functioning, stated the Minister of Regional Development, Public Administration and European Funds (MDRAPFE), Sevil Shhaideh.

The statement – quoted by Agerpres – was made Wednesday evening at a press conference in Tirgu Mures.

According to the government program, in the area of financing the local government, we are currently working on amending Law 273 on local public finances and in this respect, as of 1 January 2018, the income tax will become a revenue source for local budgets.

In case that the own mechanisms of the mayor or the county council president will fail to collect this revenue, we shall have the supported from ANAF, but the money will go exclusively to the local budgets.

This is the first major change that we bring to the public finance law,” said the Minister of Development, quoted by Agerpres.

State budget loses 30% of revenue from income tax

Now, the state budget retains 30% of the income tax, and returns 70% to the local government – under Law 273 on local public finances, as follows:

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

Specifically, based on the data released by the Ministry of Finance in late January this year, the state budget collected 27.8 billion lei in 2016 from income tax, of which 18.3 billion lei went to the local government, and 9.5 billion lei remained in the state budget:

It means that the state budget is to lose this year an amount exceeding 9.5 billion lei (more than EUR 2 billion).

And yet that is not enough: State to guarantee a budget corresponding to a minimum 750 lei/capita/year for local government

Even though the money directly collected to the local budgets will be more, it does not mean that the state budget will stop subsidizing the activity of the administrative-territorial units, explained the minister Sevil Shhaideh:

A change that we are trying to introduce –  set in the government program – refers to a minimum threshold of 750 lei per capita, starting from which the operating budget of each administrative territorial unit to be analysed. If this threshold is not covered from the revenues of the mayoralty, only then the state budget will be involved in keeping the balance by contributing amounts from the VAT or other sources.

Problems:

The first problem would be that the state budget gives up about EUR 2 billion and it remains to be seen how this amount is to be offset by cutting other allocations set for local budgets. Or maybe these allocations will be further maintained.

The second big problem is that if the state guarantees to local government a budget corresponding to 750 lei per capita, the local administrations will no longer be interested in making the due efforts to improve the revenue collection to local budgets.

It could be quite the contrary, as we saw in the election years: local officials will spare the citizens regarding the pressure of paying the taxes, as they would have a minimum budget guaranteed from the state budget.

A presumptive advantage: Because, depending on the quality of the local elected officials, there could be an advantage. Local authorities could become interested in attracting investments to create jobs. The advantage is only presumptive, as local authorities could have fought for investment even before.

Explanations and approaches:

In the name of decentralization: mayors and local barons have been asking for that even since Nastase government

The place where the money is obtained is where the money should be spent,” says Vasile Dincu (photo), who believes that the initiative is very good.

Former Minister of Public Information (2000-2003) and former Minister of Public Administration (in the technocratic government of Dacian Ciolos), he says the idea is old:

“It is a matter of courage and decentralization, in the end.

The idea is old. At any meeting with the mayors, when I was a minister of the Adrian Nastase government, we were having such discussions. In all these years, the mayors’ associations have been asking for that,” stated Vasile Dincu for cursdeguvernare.ro.

First, this is because local authorities need more autonomy and more resources for development. “It is not normal for them to depend on the allocations from the state budget“, says Vasile Dincu.

The money will not be anyway enough for the local government, he added: “Even so the allocations from the consolidated budget will still be needed because 50% of the UAT (administrative territorial units) cannot sustain themselves, therefore some solidarity must be provided by the state“.

Based on his experience as Minister of Administration and sociologist, Vasile Dincu is confident that the capacity to manage funds and build mechanisms for spending money with better efficiency at local level exists.

Regarding the corruption proportions at the local level, the sociologist says that it is just a wrong perception.

A substitute is needed at central level. “Local revenue collection performance is low”

The former Minister of Finance Anca Dragu (photo) says that the Government must come up with something to counterbalance the amount lost from the state budget.

As it was defined, the measure is a partial one. They must come up with a substitute or tell whether they made any analysis and identified where, at central level, there is no need of money anymore. There is no surplus, no amounts that can be cut.”

This radical change of tax philosophy implies a clear reduction in the revenue and expenditure at the central level, which is the source of money for financing the budget for pensions and the education (especially universities), the healthcare system (national programs, for instance), the investments in infrastructure (railways, for instance), the social assistance paid by the Ministry of Labour, etc.

On the other hand, Anca Dragu is sure that the local government does not have the necessary infrastructure to collect these amounts through municipalities and county councils as Minister Sevil Shhaideh mentioned.

The local revenue collection performance is below ANAF; that is why they took over the collection of other contributions (for healthcare). For sure the local revenue collection infrastructure is not ready and will not be ready on 1 January 2018 either”- says Anca Dragu.

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