Local government finances

According to Estonian legislation the state budget and local governments budgets are separated and local authorities have their own independent budget.

Local government budget consists of revenues, expenditures and financial transactions. The aim of financial transactions is to cover the differences between revenue and expenditure. Financing transactions bring about changes in financial assets and liabilities. Financial assets include deposits and other similar assets. Liabilities include loans taken, securities issued and other similar liabilities. The revenues and the expenditures should be balanced through financial transactions.

Local governments may use following means to finance their expenditures:

• taxes (income tax, land tax, local taxes)
• locally generated income fees and proceeds from municipal property,
• economic activity
• allocations and appropriations from the state budget
• loans

The biggest portion of income for local budgets comes from the state personal income tax. The local authorities receive 11, 8% (11, 6% until 31 December 2005) of resident’s total revenue. The tax threshold and tax exemptions are not applied. The tax is collected by State Tax Board through its regional offices. Local authority receives a fixed share, the rest goes to state budget (the income tax rate was reduced to 20% in 2009).

Land tax, which is considered a state tax in its nature, is fully paid into local budgets. Land tax is 0.1–2.5 % of the estimated value of land. In case of agricultural land the rate is 0.1–2.0 %. The local council determines the tax rate within limits given by law. The fee of natural resources and special use of water together with the extent to which they are paid into local budget is determined by the decree of the Government of the Republic.

The local government has the power to impose and levy taxes and user charges in accordance with law. Local government has quite comprehensive autonomy to manage its property and earn revenues.

Local taxes:

• sales tax
• boat tax
• advertisement tax
• road and street closure tax
• motor vehicle tax
• animal tax
• entertainment tax
• parking charge

The budgetary year of local authorities begins on January 1 and ends on December 31. The local council must pass the budget within three months after the beginning of the budgetary year.

Equalisation mechanism and grants to municipal budget

Subsidies from the state budget are the second largest source of income for the local government. Pursuant to the State Budget Act the financial resources allocated from the state budget for supporting the local budgets is the equalisation fund of local governments. Equalisation formula consists of the calculated expenditure need and accounting revenues. The deficit of the revenues to cover the expenditure need is compensated by the equalisation grant.

The purpose of the equalisation fund is to balance excessive differences among the income bases of different local authorities and to provide also the weakest municipalities with a possibility to render adequate public services to its inhabitants. The amount of the equalisation fund in a draft state budget and its distribution is determined by the negotiations between the representatives of the associations of local authorities and the Government of the Republic. Local governments provide large scale of functions and remarkable share of public infrastructure has given to the maintenance by local authorities. The most important area is education, as local authorities are obliged to maintain school houses and pay salary to teachers. General purpose block grants are allocated to local governments to enable them funds to cover expenses like salaries of teachers, subsistence benefit etc. Most publicutilities are under responsibility of local government.

Several ministries allocate earmarked grants to local authorities for special purpose or to support municipal investments.