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Ministry of Finance Unveils Local Government Financing Reform

ECOLOGYMinistry of Finance Unveils Local Government Financing Reform

The Ministry of Finance has outlined a new reform for financing local government units (LGUs), asserting that post-reform, LGU revenues will increase and become independent of central tax decisions. LGU incomes will be determined by specifying a percentage share of a given unit in the tax revenues generated in its area, covering not only PIT and CIT but also lump-sum taxes. By the end of May, ministries are also expected to review tasks assigned to local governments to standardize them.

On May 6, Finance Minister Andrzej Domański held another meeting with representatives of local government organizations to discuss the directions and new solutions in the new local government revenue system.

“The primary goal of this reform is to decouple the calculation of revenues directed to local governments from the share in the taxes owed. It is assumed that revenues directed to local governments will be a percentage of the taxpayers’ income, not the taxes collected in the local government unit’s area,” says Hanna Majszczyk, Undersecretary of State at the Ministry of Finance, in an interview with Newseria Biznes.

The change will involve calculating LGU revenues from PIT and CIT as a percentage of taxpayers’ income in the unit’s area, rather than a percentage of the tax owed from that area. This will ensure that tax exemptions, deductions, changes in social contributions, or increases in the tax-free amount do not affect LGU PIT and CIT revenues.

“Since early February, we have been meeting with representatives of local government corporations, including all corporations that are members of the Joint Government and Local Government Commission. Together, we propose various solutions and test if they meet the expected changes, but the main message of these changes is to ensure the predictability and stability of LGU revenues,” says Hanna Majszczyk.

The Ministry assures that the proposed structure will significantly restore the autonomy that has been restricted in recent years by the allocation of funds with predetermined investment goals.

“I’m not saying that determining spending directions is always bad, but in this case, as confirmed by the Supreme Audit Office’s analyses and the evaluations of the LGUs themselves, this balance has been severely disrupted. They expect to make their own decisions. But most importantly, they seek predictability, so at the beginning of the year, when LGUs build their budgets and pass budget resolutions, they know in advance what funds they can manage. This autonomy allows them to plan and execute their plans long-term,” emphasizes the Deputy Minister of Finance.

Simultaneously, work is underway to standardize tasks assigned to local governments by ministries. Each ministry will assess the relevance of maintaining these tasks. The financing method for these tasks is not uniform. According to the Act on LGU revenues, municipalities, counties, and voivodeships should receive earmarked grants sufficient to carry out the assigned tasks of government administration.

“We are currently awaiting the review of assigned tasks by the respective ministers and proposals for standardization or new charges. The responsible ministers must complete this review and submit their proposals to the Ministry of Finance by the end of May,” says Hanna Majszczyk. “The analysis will determine whether every assigned government administration task should remain an assigned task. This is also a result of the Supreme Audit Office’s audit of local government finances and the financing of assigned government administration tasks to LGUs. The audit concluded, with which the Ministry of Finance agrees, that it is necessary to reconsider whether all assigned tasks should be maintained and performed by LGUs.”

Standardizing assigned tasks aims to eliminate misunderstandings between local governments and the central government regarding the proper financing of these tasks. In some cases, determining this financing by LGUs and voivodes, who are the direct assigners, is very difficult, and clarifying these tasks will help reduce costs and avoid legal disputes. As recently reported in the Sejm by Hanna Majszczyk, the budget for this year allocates nearly PLN 35 billion for the execution of government administration tasks.

This year, the total planned general subsidy is over PLN 116 billion.

“Revenue shares are higher compared to the previous year, depending on the tax, either by an average of 40% for personal income tax or by 20% for corporate income tax. Additionally, funds for preschool teacher salary increases have been directed to LGUs for the first time. While salary increases for school teachers are reflected in higher educational subsidies, as seen in 2024 with an over PLN 20 billion increase, LGUs have had to organize funds for preschool teacher raises independently. This time, over PLN 2 billion has also been allocated from the budget for this purpose,” indicates the Deputy Minister of Finance.

Planned funds also include allowances for social workers (social assistance workers, foster care workers, and caregivers for children under three years) employed by LGUs, amounting to PLN 1,000 gross.

“The state budget will also cover the employer’s contributions related to the payment of this allowance,” emphasizes Hanna Majszczyk.

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