Local Governments’Own Taxes and Charges

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standard required in the European Union,local governments’progress over the past decade has been tremendous.During the first term ofdemocratic local governments (1990–94) alone,the length ofthe water provision network increased by 58 percent,and the capacity ofcommunal sewage treatment plants increased by 73 percent.Between 1990 and 1999, the number ofrural households connected to a water,sewage,or gas network increased about threefold.Recent experiences with EU preaccession funds shows that the majority oflocal governments have been able to learn and implement complicated procedures required to take advantage ofthe opportunities that are arising.These simple data illustrate that most local governments are able to cope with management ofthe services that they are responsible for.

Local Governments’ Own Taxes and Charges

Local governments in Poland are financed through a mixture of(a) local taxes and other own-source revenues,(b) local shares in central taxes,and (c) central general-purpose and specific grants.In this section,we concentrate on the first category ofrevenues.

The municipal government is the only tier oflocal government that has a limited power oftaxation.Both county and regional governments are financed mostly by central general and specific grants,with a considerable contribution ofshares in central taxes and a few very minorown-source revenues.One may even question whether this system ofcounty and regional finance complies with the requirements ofthe constitution,which in article 168 states that “territorial self-government units have a right to set rates of local fees and taxes,within limits decided in the law.”We return to this issue in the last section ofthe chapter.

The following local taxes are revenues ofthe municipal tier:property tax,tax on agriculture,tax on vehicles,forest tax,tax on dog owners,tax oncivil legal activities,tax on legacies and donations,and tax on small businesses.With the exception ofthe last three (which are collected by the state tax administration),local taxes are administered and collected by the municipal administration.

The general rule is that the maximum rates oflocal taxes are decided in the central legislation,although local governments may set their own rates that are equal to or lower than the ceiling level.Local governments can also use other instruments oftheir own tax policies;these instruments are discussed later.

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Property Tax Without doubt,property tax is by far the most important source ofown local revenues.Both physical persons and legal entities must pay it.The most important items subject to the tax are (a) buildings or their parts,(b) plots ofland that are not subject to agriculture or forest taxes,and (c) plots of agricultural land or forests that are used for commercial activity other than agriculture or forestry.

The general rule is that property tax is paid by the owner ofthe property (and not,for example,by the tenant ofa flat).For most categories,the tax is paid per square meter.The only exception is made for “other architectural structures”(budowle,such as antenna masts,airports,and sewage treatment plants),for which the tax base is the value used for depreciating these assets.Ifthe taxpayer does not depreciate the asset,the tax base is the market value.But this category provides an insignificant portion ofrevenues from property tax.

As mentioned above,the maximum rates are decided by the central legislation and are annually adjusted against inflation.2 For example,in 2003, the ceiling rates were Zl 0.51 per square meter for housing and Zl 17.31 per square meter for commercial buildings.

Local governments are responsible for property tax collection and administration.For individual taxpayers,the local government is obliged to deliver information on the amount to be paid (that is,the homeowner who has not received such information from the town hall does not need to pay). For legal entities,the taxpayer is obliged to calculate and pay tax regardless ofwhether such a notification has been received.

Tax on Agriculture Tax on agriculture is the second most important local tax.The basic tax rate is defined centrally,but the local council may reduce the tax rate.The tax is typically paid by the owner ofthe farm or by the farmer who rents the farm. A farm is defined as an area larger than one hectare that is used as arable land,that contains a pond,or that contains a building used for farming activity.According to the tax regulations,it does not matter whether the area is actually cultivated or not.

The tax is paid per hectare,but the area is additionally weighted by thefollowing factors:(a) quality ofsoil and (b) economic and climatic environment for farming activity.In practice this second factor is reflected by the farm’s location in one offour major tax regions (Brzeszczyńska and

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Kaźmierski 1997).The rate for one (weighted) hectare is equal to the average market price of250 kilograms ofrye during the first three-quarters of the preceding year.

Tax on Vehicles

Tax on vehicles is paid to the municipal government where the taxpayer lives or,for companies,where the owner ofthe vehicle is registered.Until 1998,it was a significant source oflocal revenue because it was levied on every motor vehicle.But since 1998,the tax base has been limited.Now,the tax is levied only on owners oftrucks with a load capacity over two metric tons,on owners of tractors and buses,and on owners oftrailers with a load capacity over five tons.

For tractors,the rate oftax depends on the capacity ofthe engine;for trucks and trailers,it depends on load capacity;and for buses,it depends on the number ofseats.

Size ofRevenues from Local Taxes

There are theoretical arguments suggesting that own-source revenues (especially local tax revenues) should constitute a considerable proportion of local budgets.Such a situation supports local government accountability, exerts pressure on “value for money”in local policies,allows local fiscal policies to be adjusted to local preferences,and reduces an excessive demand for public spending.3 As illustrated by table 9.3,own-source revenues constitute a significant but over the past decade decreasing share ofmunicipal revenues.There are two reasons for this diminishing role:

1.The scope oflocal tasks has been gradually increasing.The most important,but not only,change is related to local governments taking over responsibility for primary schools (the process that started in 1991 and finished in 1996).New functions were usually financed through new components ofthe general-purpose grant or sometimes through the increase in the local share in central taxes,but they were almost never financed by adding new sources to the list oflocal own-source revenues. 2.The local tax base has sometimes been weakened by the central legislation.The most salient example ofsuch an occurrence was a change in the tax on vehicles legislation.Tax on private cars and motorcycles was abolished as a local tax and compensated for by an increase in the excise tax on petrol.The loss oflocal revenues was compensated for by a new component ofthe general-purpose grant.