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Association of Regional Centres invites to compensate municipalities for losses caused by the tax reform

Chairman of the Board of the Association of Regional Development Centres (ARDC) Vents Armands Krauklis has sent a letter to the Prime Minister Māris Kučinskis and the Minister for Finance Dana Reizniece-Ozola, asking to carry out two important activities that would decrease the negative effect of the tax reform on municipal budgets. Chairman of the ARDC Board invites to define by law a compensation for municipalities of potential losses caused by the tax reform in full amount, as well as to provide for a mechanism of compensation of losses caused by increase of minimum wages.

“Association of Regional Development Centres highly values attempts of the Government to create a new, competitive tax policy, but simultaneously we are worried about possible consequences that may arise in result of the planned tax policy – decrease of income basis of municipalities, as well as significant increase of expense basis of municipalities due to increase of minimum wages. From the mentioned it is decrease of the income basis that may have the most serious consequences and cause crisis situations in a number of municipalities due to inability to ensure performance of their basis functions,” says V. A. Krauklis’ letter.

ARDC indicates that, although chief public officials have promised to provide municipalities with a mechanism of compensation in full amount due to possible decrease of the income basis within two next years, in order to ensure log-term stability, it is necessary to make respective amendments in normative acts.

“Therefore, we suggest make changes in the Law on Population Income Tax by expressing Sec. 26 clause one of the Law on Population Income Tax in the following edition: “Amounts of tax, from which amounts mentioned in Sec. 19 part four of this law are deducted, are paid into budget of municipality of the payer’s declared place of residence and main state budget according to distribution provided for by the annual law on state budget. By defining distribution between municipal budgets and the state, the basic principle is being observed that losses caused in result of any amendments in normative acts decreasing general income basis from income tax are compensated to municipalities in full amount,” invites ARDC.

V. A. Krauklis also stresses that simultaneously with the tax reform, ARDC municipalities are also worried by amount and rate of increase of minimum wages. “Municipalities and their enterprises employ relatively many employees getting minimum wages, therefore, from the next year municipalities will be forced to increase wages to those employees, as well as to increase remuneration of lower-paid personnel proportionally. As calculations show, a number of municipalities will be forced to use the whole increase of budgets for 2018 to cover losses related to increase of minimum wages, and in case of some municipalities this financing may be insufficient. Therefore, when adopting regulation on increase of minimum wages, we also ask to provide for a mechanism of compensation to municipalities for covering the expense part, related to the necessity to increase wages of employees.”

ARDC has previously ordered a research of independent experts – economists of the Department of Engineering Economy and Management of Rīga Technical University (RTU), in order to analyze effect of the tax reform on the budget of one specific, average by Latvian scale, Province – Dobele Province. Research of RTU economists showed that growth of minimum wages from 380 euro to 430 euro will cause growth of unemployment rate in Dobele Province from 7.3% to 9.2%. Up to 234 persons may lose their jobs in total. In turn, if population income tax (PIT) changes initially offered by the MoF will be fully implemented – both decrease of the general rate from 23% to 20% and increase of the exemption limit, Dobele Province budget revenue from PIT will decrease by 39.17%.

“The research clearly shows that serious further discussions on the form of introduction of the tax reform guidelines are necessary. There is no doubt that the existing reform model threatens by significant decrease in municipal budget revenues. This will lead to worse or more expensive educational, transport, health care, social care services and other services within the competence of municipalities. Population will probably get a few euros from the planned reform today, but in the long-term they will still lose it due to drop in the quality of life in their municipalities. Therefore, ARDC will closely watch implementation of the tax reform and specific draft normative acts resulting from it, and will be actively involved in discussions with both Ministry of Finance and Government and the Parliament committees,” previously admitted the Chairman of the ARDC Board V. Krauklis.


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