The confluence of local property tax policy and central personal income tax policy

Abstract

Theoretical background: In public economics, there is well-established research on the fiscal efficiency of local tax sources (fiscal capacity) and the sensitivity of local authorities’ tax revenues to changes in the parameters of their local tax policy (fiscal stress). However, there is a need for a critical approach to these characteristics in the conditions of the division of tax authority between central and local authorities, in particular regarding the application of a hybrid model combining the shares of local authorities in taxes that are the subject of central tax policy (personal income tax) and local tax authority over property taxation.

Purpose of the article: There are no indicators for identifying the relationship between changes in personal income taxation policy and local property taxation policy. Therefore, the theoretical goal of the article is to develop indicators for determining the willingness and ability of local authorities to compensate for the undesirable fiscal effects of the personal income taxation policy pursued by the central authorities. The research goal of the article is to evaluate the differentiation of these indicators in municipalities in Poland.

Research methods: Drawing conclusions based on the estimated basic parameters of statistics of the developed pressure and capability indicators for the population of Polish municipalities; distinguishing the subpopulations of urban municipalities, urban-rural municipalities, rural municipalities, and cities with county rights, both in the temporal and spatial dimension.

Main findings: The paper’s conceptual framework enables a critical adaptation of the fiscal stress and fiscal capacity research methods to analyse the confluence of unfavourable changes in the conducted by central government personal income taxation policy and the property taxation policy controlled by local tax authorities. The proposed pressure to compensate and ability to compensate indicators were estimated for all Polish municipalities in the years 2019–2023. On their basis, their statistics were developed, allowing for the formulation of the following conclusions. The median of the index of pressure to compensate, that is the ratio of shares in personal income tax to current expenditures subtracted by earmarked grants was stable in the years 2019–2022 despite numerous and profound shocks to municipal budgets triggered both by taxation reforms and exogenous events such as the COVID-19 pandemic and the war in Ukraine. The year 2023 saw a significant drop in exposure to unfavourable changes in personal income taxation. The decreased variation accompanied a decrease in the indicator in question. On the other hand, the median index of the ability to compensate for unfavourable changes in personal income taxation provided by central government, that is the median of relations between tax expenditures and revenues from property taxes, was very stable from 2019 to 2023. The activity of the local authorities in pursuit of tax policy did not exceed 20%, which can be assessed as a stable but low level of compensation capacity. The empirics show that the pressure-to-compensate indicator establishes noteworthy variances among municipalities depending on their type. The higher the level of urbanization, the higher the values of this indicator, as local revenues from personal income taxation in urbanized regions are usually higher. This presentation of results and comparison of the size of these indicators spatially make it possible to identify regions that may need special attention from policymakers when planning future tax reforms.