site.btaLeaving One-Fifth of Personal Income Tax Revenues to Municipalities: Likely Effects

The Institute for Market Economics (IME) has for years campaigned for financial decentralization in Bulgaria, arguing that the reform should involve reallocating one-fifth of personal income tax revenues to the municipalities. The IME proposes that personal income tax should continue to be collected centrally by the National Revenue Agency, but one-fifth of the revenues should be deducted automatically and reallocated to the municipalities on the rule that "money follows the identity card", meaning that the money goes where the taxpayer is registered, IME Senior Research Fellow Petar Ganev says in an analysis published on the institute's website on November 24.

The proposed reform would have made an extra BGN 900 million-plus in financial resources available at the local level in 2022, Ganev estimates. This means that the municipalities' own tax revenues would have almost doubled. Such a reform will improve immensely the municipalities' budget position, providing possibilities for long-term planning and sustainable investments in a local context. The change will also encourage the local authorities to work for more private investments, new jobs and higher consumer incomes.

The IME has made detailed estimates about the amount of money to be gained by each of Bulgaria's 265 municipalities as a result of the proposed financial decentralization. The predictions are based on the number of working people and the levels of income in each place. Commuting between different municipalities is factored in as well. To give just two examples, a small municipality like Apriltsi (Lovech Region, Northern Bulgaria), which is home to 1,016 employees, will receive an additional BGN 260,306 annually. A larger municipality like Kazanlak (Stara Zagora Region, Southern Bulgaria), with 27,592 employees working in its territory, will gain an extra BGN 7,998,303 annually.

Boosting the municipalities' own revenues will not be the only effect of the suggested reform, Ganev says. The changes will include measures to support smaller and poorer municipalities. Reallocating one-fifth of personal income tax revenues to the municipalities should be accompanied by well-working equalization mechanisms, including procedures to channel the standard equalization subsidy exclusively to worse-off municipalities and use part of the new resources in the same way. Linking municipal budgets directly to the local economies, increasing the municipalities' own resources and using real equalization mechanisms can have a transformative effect on the predictability and the efficiency of local governance, Ganev says in conclusion.