Minister Andrew Domański announces important changes in the financing of local governments. They are intended, among other things, to provide predictability to local budgets and at the same time make them independent of tax corrections introduced by the government.
Andrzej Domański announces: We are changing the whole philosophy
The government wants to launch a completely new system of financing local governments. – Governments PIS led to the devastation of local government finances. We want to fix the mistakes made back then step by step – says Andrzej Domański in an interview with money.pl. The Minister emphasizes that the proposed changes are twofold. On the one hand, it is a “partial covering up the losses brought by the Polish Deal“. The head of the Ministry of Finance explains that the partial reduction of losses results from the fact that the current government is not “able to compensate for everything that was taken from local governments in previous years in a year, or even two.”
The second element will be to increase the predictability of local government revenues. Domański adds that the losses brought by the Polish Deal are the result of the fact that a simple change in the preference for a flat-rate tax or manipulation of rates can completely dismantle local government finances – this is what happened in the case of the Polish Deal, in his opinion. – We are changing the entire philosophy – he adds.
This is the plan of the Ministry of Finance for local governments
The Minister reminds that currently local governments have a share in tax revenues, such as PIT and CIT, but do not have a share in the flat-rate tax. – In order to structurally repair the system, we say that from now on local government revenues will be calculated not from revenues, but from the tax base, i.e. from how much income in a given area is reported by PIT and CIT taxpayers – announces Andrzej Domański. In his opinion, thanks to this, local governments will not only have more funds, but will also have much greater predictability.
The head of the Ministry of Finance emphasizes that it is crucial because it gives local government officials independence from political decisions made in Warsaw. – If the Sejm lowers the CIT or PIT tax, or increases the tax-free amount, then in the current system the consequences apply not only to the central budget, but also to local governments. However, in the new system, local government revenues will be stable. And secondly, at the end of the year there will not be such a hole as appeared in previous years – the minister believes.
Minister Domański: No one will lose, everyone will gain
Domański calculates that the overall effects of the introduced reform are PLN 16 billion more for Local Government Units in 2025. In local governments, in addition to their own revenues, there is also a subsidy and grant system in operation today, in which “the poorer get more, and the richer get less”. The new system is also to include solidarity mechanisms. – In the case of wealthy local government units, a wealth correction may come into play. It will be made if the income per capita in a given group of local governments is 20 percent higher than the average – says Domański and adds that the government is proposing the so-called negative financial need, which will cause the income of a given local government unit to be reduced, so e.g. Warsaw will continue to pay into the system.
As for poorer local governments, the government will secure them by introducing so-called guaranteed amounts, i.e. a minimum increase in income will be applied depending on the number of residents. For example, for municipalities up to 4 thousand residents, it is a minimum of PLN 1 million, but no more than 10 percent of income.
The Minister adds that the government will operate in accordance with the principle that it provides funds for the implementation of tasks for local governments, but also creates a system that will require responsibility from local government officials. – We give them more funds, we say: you are more independent from the decisions that are made in Warsaw. At the same time, we want to end the practice that PiS used – these cardboard checks, or as some call them – IV drips – stated Domański. He also declared that every local government will benefit from this system and there will not be a single entity that will lose.
Let us recall that under the law introduced in 2021 by PiS tax reform called the Polish Deal increased tax-free amounts to PLN 30,000, the second tax threshold went up – from PLN 85.5 thousand to PLN 120,000. At that time, the then head of the Ministry of Finance estimated that the group of taxpayers in the second tax threshold would shrink by half – from over 1.2 million to about 600,000 people. As a result, revenues from PIT decreased and at the same time the finances of local governments decreased.