As Marina Klepo/Novac writes on the 11th of July, 2020, the announcement of income tax reduction pleasantly surprised many, because such moves by the Government are generally not expected immediately after the elections, but what is certain is that not everyone is happy about it, and Croatian municipalities are going to have much less to play with as a result.
Income tax revenues from 2018 have gone entirely to local budgets, and according to the Ministry of Finance, they amounted to 14.6 billion kuna last year. If Prime Minister Andrej Plenkovic remains adamant in his decision to reduce the income tax rate from 36 percent to 30 percent and also from 24 percent to 20 percent from January the 1st next year, a rough calculation by tax experts shows that Croatian municipalities (local units) could be left without about two billion kuna.
Given the fact that the current structure of local self-government units across Croatia would find it incredibly difficult to bear the weight of the loss of that amount of revenue, the question arises as to whether the Government’s announcement of a reduction in income tax rates implies the plotting of a slightly more ambitious plan is going on. This could be concluded, judging by the statements made during the election campaign, including that of the Minister of Administration and a member of the HDZ Central Committee, Ivan Malenica.
With the reduction in the number of ministries, Malenica said that “the number of local officials will be halved, everything will be done to make the public administration more efficient and effective”. This includes coming forward with digitalisation to the level of Croatian municipalities and local governments and connecting all local bodies and institutions to central state registries. Such a move would naturally imply a great number of services, applications and platforms.
The dynamics of the Government’s changes are yet to be seen, but it can be expected that with the reduction of income tax rates, it will go hand in hand with measures to solve the problem of loss of income of Croatian municipalities/local units. When they were left without a part of their income during the previous rounds of tax changes, the Minister of Finance, Zdravko Maric, found a way to compensate them from the central budget or to leave them other revenues, such as interest taxes. If a similar scenario happened this time, Danijel Nestic from the Institute of Economics believes that it wouldn’t be good for the simple reason that it would mean increasing the dependence of local units on the central government itself, although Croatia already has a very high level of centralisation.
”Maybe now is the opportunity for us to reconsider our fiscal capacities and reduce the number of local units. Of course, this doesn’t have to be done by a decree of the central Government, but the Government can set criteria to motivate municipalities to merge,” said Nestic, emphasising that these criteria must be related to the ability to perform functions and services. In addition, it imposes the need to provide Croatian municipalities with greater independence and flexibility when collecting their own revenues.
Therefore, Nestic believes that the formerly wildly unpopular issue of introducing a real estate/property tax as the original income of local units should be reopened. Although this story has been ”current” in some way or another for seven years, there were problems with the readiness of the system for its introduction, as well as an enormous level of resistance of part of the public.
In recent years, Minister Maric has largely avoided the topic of property tax, emphasising that “we all know very well how the last attempt went.” The hated tax was supposed to be introduced on January the 1st, 2018, as part of the tax reform, and the law on local taxes passed through two parliamentary readings, which provided for the abolition of utility fees, monument rent and taxes on holiday homes, ie merging three levies into one.
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