Local governments need greater incentives to support the development of entrepreneurship

The Chamber submitted proposals to the Ministry of Regional and Rural Affairs aimed at helping local governments generate more revenue from regional business activities and stimulating entrepreneurship as a whole. According to the Chamber, the current tax system does not sufficiently motivate local governments to improve the business environment, as their primary source of revenue is personal income tax, which is only paid to the municipality where the person resides.

The first proposal suggests that, in the future, personal income tax should be equally divided between the municipality of residence and the municipality where the individual works. The Chamber has made this same proposal in previous years as well. This system would directly increase the motivation of municipalities to promote the local business environment and encourage cooperation with entrepreneurs. For example, if a new company starts operating within a municipality's territory or an existing company increases the number of jobs, the municipality’s tax revenue would automatically rise, regardless of whether the new employees reside within that municipality or not.

Before such a change is made, the Chamber recommends conducting an impact analysis to assess whether certain exceptions should be introduced into the law. For instance, special provisions could be made for Tallinn and Tartu, and possibly for some surrounding municipalities, to ensure that their revenue base does not grow excessively, while at the same time preventing a decrease in the revenue base for more remote municipalities.

The second proposal involves allocating a larger portion of environmental fees to local governments. Currently, a portion of the fees for mineral extraction rights, water usage rights, and wind energy production is allocated to municipal budgets. However, pollution fees, fishing rights fees, hunting rights fees, and deforestation fees are largely directed to the state budget.

Revisiting the distribution of environmental fees would benefit economic activities that involve mineral extraction or pollution. The Chamber believes that, in line with the "polluter pays" principle, the revenues from environmental fees should go to the regions and local governments where the pollution occurs.

Since various tax issues are still being discussed, the Chamber has proactively opposed the idea of adding a tourism tax to the list of local taxes. With accommodation services set to be taxed at 13% VAT instead of the current 9% starting in early 2025, and other tax increases looming, introducing a tourism tax as an additional burden would not be reasonable. The sector needs tax stability in the current situation.