Decentralization: 8+2 > 10+2
For the second time in a row, right on the eve of local elections, the idea of fiscal decentralization through personal income tax increase has emerged. In 2015 this happened after a statement of the Minister of Finance Vladislav Goranov and this year the occasion was an interview given by the deputy prime minister Tomislav Donchev. Although he later advocated for decentralization by sharing a portion of the already collected income tax, the discussion had an initial false-start.
In 2015 and also this year, the focus is put on the income tax increase (of up to 2 percentage points) benefiting the municipalities (10+2) instead of implementing the strategic commitment to share part of the collected tax (8+2). For a second time in a row, right on the eve of local elections, the decentralization debate turns into a debate for higher taxes - a topic that, as we reviewed a month ago, is taboo for the local authorities as elections approach. Nobody has an interest to discuss higher taxes, while the voters are headed to the ballot boxes, including the prime minister Boyko Borisov, who promptly tried to put an end to the debate.
We remind you that the failure of several governments to implement the idea of fiscal decentralization as promised a long time ago, is clearly described in the Decentralization Strategy 2016-2025 that is already in force. Regarding the execution of the previous strategy (2004-2015), in the new one it is stated: The decentralization process was blocked [...due] to the refusal of the central government to transfer part of the personal income tax proceeds to the municipalities as their own revenue.
Imagine how different the pre-election debate would look like if the candidates for municipal council and municipal mayors were able to freely manage a portion of the collected taxes instead of having the right to increase them. This would constitute the preconditions for a genuine political competition, based on identifying local problems and offering local solutions, which is a far cry from the typical bragging/dissatisfaction with the results of the European projects. Sharing part of the already collected personal income tax with the municipalities would decrease the level of government dependency, namely the constant requests to the Council of Ministers for additional funds for the local authorities, but it would also make them less dependent on the European funds. The structural effect that the “8+2” model would achieve on public expenditure distribution between central and local authorities would even purely mathematically be more clearly defined than the alternative “10+2”. In the best-case scenario, the municipalities would not only be entitled to a portion of the proceeds, but would also have the authority to set the tax rate within certain limits. This would better enable the municipalities to impact the business and the living conditions, compared to the alternative which would increase the burden on taxpayers.
In addition, if the fiscal decentralization process takes an upward direction, it would set a precedent that would be difficult to overrule in the following years. If the central government keeps the whole amount of the 10% on the personal income, it is logical to expect the following steps towards fiscal decentralization to be related again to heavier tax burden in general. This approach: 1) would make each step towards local financial independence harder and publicly unacceptable and 2) would leave the taxpayers foot the bill and at the same time lead to decrease of the external competitive power of the Bulgarian economy.