JAROSŁAW OLEJNICZAK, PH.D. Introduction DOI: /CZ.MUNI.P

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1 DOI: /CZ.MUNI.P FISCAL EFFICIENCY AND STABILITY OF OWN REVENUES IN URBAN LOCAL SELF-GOVERNMENTS BUDGETS BEFORE, DURING AND AFTER CRISIS EXAMPLE FROM LOWER SILESIAN VOIVODESHIP JAROSŁAW OLEJNICZAK, PH.D. Department of Finance Economic Sciences Faculty Wroclaw University of Economics Komandorska 118/120, Wroclaw, Poland Annotation The main objective of this paper is presentation and analysis of own revenues system in 32 urban local self-governments (LSG) from Lower Silesian voivodeship in changing economics conditions during years period. It takes into consideration average estimates and also particular types. The estimates come from financial reports from The Regional Chamber of Audit. LSG budgets need relatively stable revenues to sustain their responsibilities. Their revenues should be also rather resistant from crisis and not to overreact to economic fluctuations. As it can be observed shares of own revenues in total revenues between 2006 and 2014 were changing from average 59% in 2006 down to 56% in 2010, finally reaching about 60% in The average growth of own revenues was slower than average growth of total revenues in One of main sources of revenues are shares in central government PIT and CIT taxes. Share of those revenues in total revenues sharply dropped in This suggests that shares income taxes are not stable and efficient source of own revenues during crisis (2010). Differences between minimal and maximal share of local taxes and charges were rising - from 24 p.p.(2006) to 36 p.p.(2014). In case of real estate tax we can also observe steady growth of average of it (about 7 to 10 p.p.) each year.revenues from their property are important source of revenue and that were very varied over the years. The main reason of it, is inclusion of revenues from selling municipal property what is occasional. Key words local government revenue, own revenues, local taxes and charges JEL classification: H2, H71 Introduction Local self-government in Poland exists over 20 years and during this time the system of its revenues evolved. Last ten years we observe lack of important changes in own revenues system. That s why one question that needs to be asked is if the Polish local government own revenues system is compatible with the guidelines of The European Charter of Local Self-Government (1985) and second one if it is effective system in all economics conditions (Patrzałek, 2010, p.42). After beginning from a short description of legal basis of local government revenues the area of own revenues of urban local selfgovernments of Lower Silesian voivodeship in Poland is discussed. The main reason to choose urban units are differences between their revenues structure. Perhaps the most serious disadvantage of this approach is size of the sample (32 of 33 urban units) but it is very important to underline that it includes all urban units of one region, and additionally there are also important differences in the nature (social, economic) of these cities. The conclusions could be used to show potential directions of changes in polish local finance. 440

2 1. Legal basis of local-government own revenues The Constitution of the Republic of Poland (Konstytucja Rzeczypospolitej Polskiej, 1997, Art.167) specifies three types of revenues of local self-governments : own revenues, general subsidies (grants) and specific grants from the State. The independence of the local self-government operations and it s development, among many issues, depends on its financial situation which is closely connected with their access to efficient income sources especially own revenues (Ignacy, Kopyściański, 2011; Olejniczak, 2009, p. 234). It can be assumed that efficient and varied revenue sources make the economy of local self-governments less susceptible to instability and limitations of donation mechanism (Patrzałek, 2010, p.42). Own revenues can be divided (Ustawa z dnia 12 stycznia 1991 o podatkach i opłatach lokalnych, Art. 4) to (local) taxes, charges, shares in central government taxes ( PIT about 39% of tax collected on local self-government s territory and CIT about 7%), revenues from municipal property, and other revenues (see also Patrzałek, 2010, p. 44). First group taxes consist of two sub-groups. In case of such taxes like: real estate tax, agriculture tax, forest tax, means of transportation (vechicle) tax, the local self-government councils may differentiate (lower) the level of rates applying specific criteria in particular situations (negative taxing power). In case of second sub-group of taxes (flat rate income tax, inheritance and donation tax, tax on civil law entities) councils only receive money collected by central government tax administration (no taxing power). Second group includes stamp duty, market (sell) charge, local charge, administrative charge, dog charge or charge from permises for selling alcoholic beverages. Charge rates are usulally set by local self-government councils but for e.g. stamp duties are the same in all local self-governments. Usulally very important part of own revenues for local self-governments are shares in central government taxes - PIT and CIT (revenue-split fixed in legislation). Especially PIT paid by local self-government residents lets local-governments acquire new payers (and revenues) because they only have to declare where they want pay their personal income tax. As it was mentioned local self-governments don t have taxing power in case of PIT and CIT. Revenues from property come from local self-government property sale, fees or payments for perpetual usufruct, fees or payments for permanent management of properties, rental, easement and usufruct fees. There are also other own revenues such as revenues received from the budgetary units of the local self-governments and proceeds from units of extra budgetary management of the local selfgovernments and other revenues due to the local self-government on the basis of the separate regulations. 2. Own revenues of urban local self-governments before, during and after crisis - case of Lower Silesia voivodeship. Local budgets need relatively stable revenues to sustain their responsibilities such as public education, social assistance, road maintenance, waste management, public transportation, care for the elderly and water supply. Their revenues should be also rather resistant from crisis and not to overreact to economic fluctuations. As it can be observed share of own revenues in total revenues of urban local self-governments of Lower Silesian voivodeship between 2006 and 2014 were changing from average (unweighted) 59% in 2006 up to 64% in 2008 and down to about 56 % in 2010, finally reaching about 60 % in It should be noted that difference between minimal share and maximal was over 40 per cent, but most of local self-governments were rather close (+/- 10 p.p.) to average level of share (tab. 1). 441

3 Tab. 1: Own revenues as a part of total revenues of local self-government entities bodies in (in %) Lower Silesia urban municipalities Municipality Bielawa Boguszów-Gorce Bolesławiec Chojnów Duszniki-Zdrój Dzierżoniów Głogów Jawor Jedlina-Zdrój Kamienna Góra Karpacz Kłodzko Kowary Kudowa-Zdrój Lubań Lubin Nowa Ruda Oleśnica Oława Piechowice Pieszyce Piława Górna Polanica-Zdrój Szczawno-Zdrój Szklarska Poręba Świdnica Świebodzice Świeradów-Zdrój Wojcieszów Zawidów Zgorzelec Złotoryja Looking at the relation between growth of own na total revenues we can observe that during crisis (especially in 2009 y) almost in all local self-governments growth of own revenues was slower than growth of total revenues. It should be mentioned that, despite crisis, total revenues and own revenues of most units had upward trend. In the analysed period the average growth of own revenues was slower than average growth of total revenues only in but in that period up to 85 per cent of local self-government units reported to have a lower growth of own revenues than total ones (tab. 2). During period almost 1/3 of all units reported such situation while in 2007 only two. Table 3 shows changes in local self-government revenues in the years (previous year = 100 %. The single most striking observation to emerge from the data comparison was significant difference between levels of change.for example only between 2006 and 2007 year one of local selfgovernments reported over 300 % rise of own revenues while in next years maximum changes did not reach 200 %. Data from all local self-government (draw. 1) makes it more clear. As we can see on following drawing only few of local self-governments reported so high changes during described period. A possible explanation is that some kind of revenues appears to be sporadic. To verify this it is necessary to analyse main sources of local self-government own revenues. 442

4 Tab. 2: Relation between growth of own revenues and growth of total revenues of local self-government entities bodies in Lower Silesia urban municipalities Average Minimum Maximum Growth of own revenues slower than growth of total revenues (number of units) 2/32 12/32 28/32 26/32 10/32 8/32 11/32 10/32 Source: Own calculation Tab. 3: Changes in level of own revenues of local self-government entities bodies in (in %, previous year = 100) Lower Silesia urban municipalities Average Minimum Maximum Decline (no. of units) 4/32 10/32 21/32 8/32 10/32 8/32 7/32 6/32 Fig.1: Changes in level of own revenues of local self-government entities bodies in (in %, previous year = 100) Lower Silesia urban municipalities 350% 300% 250% 200% 150% 100% 50% 0% BIELAWA BOGUSZÓW-GORCE BOLESŁAWIEC CHOJNÓW DUSZNIKI-ZDRÓJ DZIERŻONIÓW GŁOGÓW JAWOR JEDLINA-ZDRÓJ KAMIENNA GÓRA KARPACZ KŁODZKO KOWARY KUDOWA-ZDRÓJ LUBAŃ LUBIN NOWA RUDA OLEŚNICA OŁAWA PIECHOWICE PIESZYCE PIŁAWA GÓRNA POLANICA-ZDRÓJ SZCZAWNO-ZDRÓJ SZKLARSKA PORĘBA ŚWIDNICA ŚWIEBODZICE ŚWIERADÓW-ZDRÓJ WOJCIESZÓW ZAWIDÓW ZGORZELEC ZŁOTORYJA As it was mentioned earlier, one of main sources of revenues appear to be shares in central government PIT and CIT taxes. During analysed period average share of those revenues in total revenues was changing but omitting the peak in 2008 and drop in 2010 data form table 4 show that average share of it lies in the range of almost 19 to little over 20 per cent. It shows also that differences in impact on local self-government unit budget of this kind of revenue were significant. To better reflect how those shares in central taxes were changing we should look at table 5. It can be observed that revenues from this source are very susceptible to financial crisis. As central government revenues from PIT and CIT decreased from 2008 till 2010, local self-government unit experienced also sharp drop of it. In 2009 only 3 of 32 units reported increase of revenues from PIT and CIT shares, while in 443

5 2007 and after 2010 almost all of them recorded increase of this kind of revenues. This suggests that shares in PIT and CIT are not stable and efficient source of own revenues during crisis but they are very efficient during economic growth (expansion). Tab. 4: Share in central government taxes PIT and CIT as a part of total revenues of local selfgovernment entities bodies in (in %) Lower Silesia urban municipalities Item Average Minimum Maximum Source: Own calculation Tab. 5: Changes in level of share in central government taxes PIT and CIT of local self-government entities bodies in (in %, previous year = 100) Lower Silesia urban municipalities Average Minimum Maximum Decline (no.of units) 0/32 0/32 29/32 16/32 0/32 2/32 3/32 4/32 As pointed out in the introduction to this paper very important to local self-government units is group of local taxes. As explained earlier this group consists of five taxes and over ten charges, additionally with different taxing power of local self-government. It seems to be obvious that in this case differences between units are huge. Table 6 reveals that there has been slight growth of differences between minimal and maximal share of local taxes and charges in local self-government units budgets. As we can see in 206 difference was about 24 p.p. while in 2014 it reached about 36 p.p. Average share of this kind of revenues was lowest in 2007 year (21.35%) and highest in 2014 year (27.05%). We should mention that there is only one important, taking into consideration impact on units budget, source of revenues in this group for urban communities real estate tax. In the analysed period we can observe constant average growth of local taxes and charges but there were units with decline of it. In 2007, 2008 and 2014 it drop of this kind of revenues was reported by 2 units, in 2009 and 2011 by mor than 10, and in 2010 nad 2012 by 6. (tab. 7). It seems that local taxes and charges are more resistant to the crisis than PIT and CIT. Tab. 6: Local taxes and charges as a part of total revenues of local self-government entities bodies in (in %) Lower Silesia urban municipalities Item Average Minimum Maximum Tab. 7: Changes in level of local taxesand charges of local self-government entities bodies in (in %, previous year = 100) Lower Silesia urban municipalities Average Minimum Maximum Decline (no. of units) 2/32 2/32 12/32 6/32 11/32 6/32 1/32 2/32 Comparing the data from the table 6 and 8 we can notice that from 2006 till 2013 difference between averages are similar (6 to 7 p.p.), and only in 2014 year it peaks. We can also observe steady growth of average fo it (about 7 to 10 p.p.) each year, and small number of units (up to 11) reporting decrease of 444

6 revenues from real estate tax (tab.9). For better understanding reasons of relative stability of this source of revenues we should to know that tax rates are set by the local self-government council but their maximal level is set in every year s announcement of Ministry of Finance (Ustawa z dnia 12 stycznia 1991 o podatkach i opłatach lokálních, 1991). Most councils apply the maximum rates but there are quite often different tax reliefs. Tab. 8: Share of real estate tax in total revenues of local self-government entities bodies in (in %) Lower Silesia urban municipalities Item Average Minimum Maximum Tab. 9: Changes in level of own revenues from real estate tax of local self-government entities bodies in (in %, previous year = 100%) Lower Silesia urban municipalities Average Minimum Maximum Decline (no. of units) 7/32 5/32 11/32 6/32 5/32 3/32 8/32 12/32 When analyzing own revenues of local self-government units it is hard to forget about revenues from their property. This is the last important source of revenue and as it is shown in table 10 it is very varied over the years. Of course it is possible to calculate average share of it in total revenues it can be from 8 to 13 per cent, but due to nature of it differences between local self-governments are enormous. The main reason of it, is inclusion of revenues from selling municipal property what is occasional. For some local self-governments, due to their favorable geographical position, revenues from a single transaction may exceed several times their property revenues from previous year. This part of revenues seems to be unstable and relatively uncertain for local self-governments. Tab. 10: Changes in level of own revenues from property (incl. sell) of local self-government entities bodies in (in %, previous year = 100%) Lower Silesia urban municipalities Municipality Bielawa Boguszów-Gorce Bolesławiec Chojnów Duszniki-Zdrój Dzierżoniów Głogów Jawor Jedlina-Zdrój Kamienna Góra Karpacz Kłodzko Kowary Kudowa-Zdrój Lubań Lubin Nowa Ruda Oleśnica Oława Piechowice Pieszyce

7 Municipality Piława Górna Polanica-Zdrój Szczawno-Zdrój Szklarska Poręba Świdnica Świebodzice Świeradów-Zdrój Wojcieszów Zawidów Zgorzelec Złotoryja Analyzing rest of own revenues we can say that they are marginal and usually they do not cross 1 per cent limit of share in total revenues. Closest to this limit is tax on civil law entities witch 1 2 per cent share. Conclusion The analysis of scale and role of own revenues of urban local self-governments of Lower Silesian voivodeship proves that there are three main types of revenues share in PIT and CIT, real estate tax and revenues from property. Only one of them real estate tax can be pointed as stable and effective source of revenues. Shares in taxes in my opinion do not secure financial stability in time of crisis and revenues from local self-government property are occasional. As we could notice urban units are rather dependent from revenues other than own revenues in about 40 per cent. We can observe that during crisis almost in all local self-governments growth of own revenues was slower than growth of total revenues. It was caused because drop of shares in PIT and CIT and decrease of different small revenues. Summarizing - although it is claimed that the structure of local self-governments own revenues in Poland is adapted to cities where taxes and local fees can play a key role, those urban units have also problems with revenues stability in time of crisis. Literature [1] [2] [3] [4] [5] [6] [7] [8] European charter of local self-government, (1985). Strasbourg. IGNACY, J., KOPYŚCIAŃSKI, T., (2011). Selection Criteria Of Strategic Goals For Local Governments. Argumenta Oeconomica, vol. 27, no. 2. ISSN Konstytucja Rzeczypospolitej Polskiej z dnia 2 kwietnia 1997 roku Dz.U. z 1997 r. Nr.78. Poz. 483 (Cosnstitution of the Republic of Poland) OLEJNICZAK, J., (2009). The own revenues of rural local government in Lower Silesia voivodship. In Agrarian Perspectives XVIII Strategies for the Future, Peer-Reviewed Paper Collection of International Conference. Prague: Czech University of Life Sciences Prague. pp ISBN PATRZAŁEK, L., (2010). Finanse samorządu terytorialnego. Wrocław: Wydawnictwo Uniwersytetu Ekonomicznego. ISBN Regionalna Izba Obrachunkowa we Wrocławiu, (2015). Wykonanie budżetów jst województwa dolnośląskiego w latach IV kwartały [online]. [cit ]. Ustawa z dnia 12 stycznia 1991 o podatkach i opłatach lokalnych Dz.U. z 1991 r. Nr. 9. Poz. 31 z późn zm. (Law on local taxes and charges) Ustawa z dnia 13 listopada 2003 o dochodach jednostek samorządu terytorialnego Dz.U. z 2003 r. Nr Poz z późn zm. (Law on revenues of self-government) 446