Health and social services solution will not raise the tax ratio
Health, social services and regional government reform will not increase the taxation of work nor raise the total tax ratio. Following the reform, taxpayers will pay less municipal income tax and more state tax than at present. According to the current estimate, the tax percentage of all municipalities will be reduced by 12.3 percentage points.
Health, social services and regional government reform will mean the transfer social and health services as well as rescue services from the municipalities to the counties in the year 2019. The Government released the preliminary draft bills on the reform on Wednesday, 29 June.
Municipal income tax will be lowered by legislation
According to the draft bills, the revenue of municipalities will be reduced in such a way that the change reflects the costs of the tasks transferred to the counties. This will be done by decreasing central government transfers to local government, reducing municipal income tax revenue and lowering the municipalities’ share of corporate tax revenue.
Under the proposal, municipal income tax revenue will be reduced by about 11.32 billion euros. The reduction will be carried out in such a way that the tax percentages of all municipalities are lowered by the same amount through legislation in 2019. According to the current estimate, the tax percentage of all municipalities will be lowered by 12.3 percentage points.
The changes in municipal income tax percentages will be limited in the years 2020 and 2021. In 2020, the tax percentage may be no more than half a percentage point and in 2021 no more than one percentage point higher than in 2019.
Municipalities’ share of corporate tax revenue will be reduced by 500 million euros. Otherwise the corporate tax share of local government revenue would increase too much when the local government revenue decreases from the present level.
Corporate tax revenue may be very volatile along with economic cycles, and is thus ill-suited as a source of financing for local government expenditure. On the other hand, the municipalities’ share of corporate tax revenue encourages municipalities to promote economic activity and employment in their territory.
Taxation of work will not rise
State taxation will increase correspondingly, because the state will finance the counties’ tasks. The reform will be implemented in accordance with the Government’s policy outline in such a way that the taxation of work does not rise and the total tax rate does not increase. This will be ensured in conjunction with the final preparation.
The increase in state taxation will in principle be the same as the decrease in municipal tax revenue.
The increase will be carried out by changing the taxation scales for earned income.
The state’s share of corporate tax revenue will be increased by 500 million euros, or by the same amount as the reduction in the municipalities’ share.
The most significant change in the taxation of earned income is that the state income tax scale will begin at a clearly lower income level than at present and will have more steps. In addition, changes will be made to, among others, the earned income deduction and the basic deduction as well as to the standard pension-income deductions in municipal taxation and state taxation.
Possible changes in the levels of taxation very slight
The reform will be implemented in such a way that its impacts on taxpayers’ level of taxation are as slight as possible. Municipal income taxation will in principle be decreased by the same amount as state taxation is increased.
Following the reform, taxpayers will pay less municipal income tax and more state tax than at present, but as a whole the level of taxation will remain almost the same. Very slight changes in the levels of taxation are, however, possible.
Transfer of property will not lead to tax consequences
The transfer of property from the joint municipal authorities to the counties, and further to the national limited company, will not lead to tax consequences in income taxation or property transfer taxation.
The Ministry of Finance is preparing provisions on value added taxation separately, and a Government proposal dealing with them will be made later.
All of the calculations are preliminary. The Ministry of Finance will update the calculations with the latest information as the preparation proceeds.
The Government published draft bills on health, social services and regional government reform (Government press release 29.6.)
Terhi Järvikare, Director General, Tax Department, tel. +358 2955 30113, terhi.jarvikare(at)vm.fi
Special Adviser Laura Åvall, tel. +358 50 361 7511, laura.avall(at)vm.fi