site.btaSharing Personal Income Tax Revenues with Municipalities Would Lead to Greater Financial Autonomy at Local Level

An analysis of municipal tax policy in Bulgaria shows that in recent years there has been a clear trend towards increasing local taxes, but without this having a real impact on the financial autonomy of municipalities. This is according to an analysis by the Institute for Market Economics (IME) of the state of municipal budgets in Bulgaria and opportunities for expanding the financial autonomy of local authorities, IME said in a release Friday.  

A model in which local tax revenues depend almost entirely on the property market - through property tax and tax on the acquisition of property - cannot guarantee adequate own revenues for local authorities, the analysis notes, adding that structural change in local government is possible through the transfer and/or sharing of tax revenues with the central government.

IME’s estimates indicate that sharing one-fifth of the revenue from personal income tax would bring additional resources of over BGN 1.2 billion to Bulgarian municipalities. Applying the principle of “money follows the ID card” would ensure that new tax revenues for municipalities are distributed to the benefit of the places where people live - according to their permanent address, not their place of work. The reformatting of equalization mechanisms would also allow for a more effective policy to be pursued in support of the less developed municipalities in the country.

The Institute also believes that sharing personal income tax revenues with municipalities would lead to greater financial autonomy at the local level, as well as more incentives for local authorities to work to attract investment, new jobs and higher wages. According to them, real steps towards fiscal decentralization would also trigger a debate on administrative and territorial reform, which should be aimed at a natural consolidation of the municipal map and a reduction in the number of municipalities in the country.

The analysis also notes that municipal budget expenditures in Bulgaria will reach BGN 14.7 billion in 2024. The significant increase in local expenditures after the pandemic has been driven almost entirely by transfers from the central government. Over the past ten years, there has been a serious decline in the financial autonomy of municipalities, measured by the share of own tax and non-tax revenues in total local expenditure. The share of municipalities' own revenues in Bulgaria has shrunk from over 40% in 2015-2017 to less than 25% in 2024.

A review of the experience of EU countries, and especially of Central and Eastern European (CEE) countries, shows that Bulgaria lags behind both in terms of the role and responsibilities of local authorities and in terms of financial autonomy, the analysis further notes. Municipalities in Bulgaria have a smaller fiscal role than most CEE countries and are more dependent on transfers from the central government, the IME analysis says, adding that this leads to fewer opportunities for policies and investments tailored to local goals and priorities.