The reform of federal relations and local self-government: goals and mechanisms of realization in budgetary and tax legislation.
Under present conditions, the most important goal is to form and develop the system of budget organization which permits the conduct of independent regional and local fiscal policy within the limits of legislated distribution of powers at different levels of authority.
To achieve this goal, it is necessary to bring local government closer to the population and to provide for the efficiency of municipal governments in solving local problems and administering certain state powers. The achievement of this purpose would require changing the territorial bases of local self-government and improving intergovernmental relations, such as those between the federal subjects and organs of local self-government. In order to provide this balance on the whole territory of the country (which is a general principle of the organization of local self-government), federal legislation should account for various forms of municipal government.
This conception was the basis of the Federal Law “On General Principles of the Organization of Local Self-Government in the Russian Federation” (Federal Law 131, October 6, 2003). The law provides a strong tie between the organization of local self-government and its financial base.
Along with that law, during the State Duma’s fall 2003 session, the bill “On Entering Changes and Additions to the Tax Code of the Russian Federation and Stopping the Effect of the RF law ‘On the Bases of the Tax System in the RF’,” was read for the first time as well as the bill “On Entering Changes and Additions to the RF Budget Code in Regard to Regulating Intergovernmental Relations.” Both bills were introduced by the Government of the Russian Federation.
After these bills are adopted (in accordance with the federal laws “On Entering Changes and Additions to the Federal Law ‘On General Principles of Organization of Legislative (Representative) and Executive Organs of State Authority in the Subjects of the RF’ (Federal Law 95 from July 4, 2003) and ‘On General Principles of Local Self-Government Organization in the Russian Federation’” (Federal Law 131 from October 6, 2003), a legislative base for reforming federal relations and local self-government will be created.
The goal of this reform will be to create and introduce, beginning from 2006, a new system of intergovernmental relations. The system will be based on distributing fiscal budgetary and tax powers between authorities of different levels, changing the budget organization and general principles of the Russian budget system, and distributing tax incomes between different levels of the RF budget system.
One of the most significant changes, suggested by the law “On General Principles of Local Self-Government Organization in the Russian Federation,” is the new approach toward territorial organization of local self-government based on the mandatory creation of municipal governments on two levels of territorial organization.
If we examine this innovation, judging its practical reason and the efficiency of the solution of local issues, we will notice that the realization of the suggested model will bring local governments closer to the people, while the set criteria for creating a settlement of a certain size (more than 1000 people, as a rule, and more than 3000 for densely populated territories) is directed toward forming an active local government which will be able to solve issues of local significance.
At the same time, the above-mentioned law and bills have certain disadvantages.
It would be necessary to define in the federal law “On General Principles of Local Self-Government Organization in the Russian Federation,” that mandatory creation of municipal governments on two territorial levels (that is, in settlements and metropolitan areas, as well as in urban districts) presupposes forming local budgets on two levels, i.e. there should be created a fourth level of the budget system of the RF (based on the principles of the Russian budget system stated by Article 28 of the RF Budget Code which include the unity of the RF budget system, accruals and deferrals between the levels of the RF budget system, independence of budgets, and others).
The next issue is the following: if a representative organ of a municipal government is formed by delegating deputies from (Subc. 1 of C. 3, Art. 35) constituent settlements, its actions in regard to establishing and introducing local taxes and dues, regulating the expenses of the settlements’ local budgets and giving financial aid to certain settlements may be considered to be illegal. This is caused by the fact that a local representative organ has the exclusive power to form and supervise local budget administration, as well as to establish, change and abolish local taxes and fees (Article 12 of the Tax Code of the Russian Federation and Article 64 of the Budget Code of the Russian Federation).
Simultaneous use of different methods of forming municipal representative organs (through direct elections and delegating representatives of constituent settlements), suggested by the law, presupposes a different order of forming municipal budgets and varying amounts of incomes and expenses in them. The budgets of municipal areas with representative organs formed by delegates from settlements will be granted subventions from the local municipal budget to solve local “inter-municipal” issues.
In addition, the law suggests a mechanism which would permit the permanent regulation of transfers from some federal taxes to the budgets of municipal governments to be formed differently, in accordance with the RF Budget Code, in order to meet the needs of different categories of municipal governments depending on the method of constituting their representative organs, as stated by the laws of the federal subjects.
This contradicts both the Tax and the Budget Codes of the Russian Federation, since tax and budget powers of governments cannot vary depending on the territory on which they function; neither can they be changed according to the laws of the federal subjects and the legislative acts of local government organs.
Therefore, it would be reasonable to exclude from the law the provisions on the dependence of forming revenues for local budgets from the means of forming representative organs of municipal areas.
At the same time, delegating representatives of settlements to the area’s representative organ is limited by the law. It is used in the case in which, during a year which begins after the new law, it was supported by representative organs of at least two thirds of the settlements which are located within the municipal area.
Furthermore, the law assumes that subventions from city and rural budgets are granted both in a mandatory and a voluntary order, based on agreements between local governments of settlements within a municipal area and their municipal governments about the transfer of powers from the latter to the former at the expense of subventions granted from the budgets of those settlements to the municipal area budget.
If the voluntary order (based on agreements) of transferring revenues from one municipal agreement to another (including municipal governments formed on different territorial levels – in settlements and municipal areas) is in accordance with principle of budgetary independence stated by Clause 1 of Article 132 of the Russian Constitution and by Article 31 of the Budget Code of the Russian Federation, then making it voluntary to withdraw funds from local budgets (as subventions) in order to solve local “inter-municipal” problems does not correspond with the above-mentioned principle of the budgetary system of the Russian Federation. Besides, the introduction of such a means of financing of local “inter-municipal” issues cannot be justified by only introducing it in those municipal areas where local representative organs are formed through delegating deputies of the settlements’ representative organs.
Granting subventions from the settlements’ budgets, on the one hand, does not permit for executing the independent budgetary policies of the settlements, but on the other hand, it makes the financing of municipal areas’ expenses directly dependent on the efficiency of forming revenues in the budgets of settlements. At the same time, municipal area budgets bear the responsibility to equalize the budget security of urban and rural settlements.
In this connection, it would be necessary either to account for subventions from the federal subject’s budget to the municipal area budgets for executing local inter-municipal issues, or finance municipal areas at the expense of budgetary revenues of the settlements only based upon agreements between the local governments of the settlements comprising the municipal area and the local government of the municipal area. Besides, it is possible that the amount of financial aid forwarded from regional budgets to the budgets of settlements will be reduced, or the regulations concerning deductions from federal and regional taxes and fees set by the authorities of the federal subjects will be decreased.
There also exist a number of other problems connected with the Federal Law “On General Principles of Local Self-Government Organization in the Russian Federation.” More exactly, it would be reasonable to simplify the system of forming local budgets from federal and regional taxes and fees and, to a certain extent, unify its use in various subjects of the Russian Federation with consideration of making this system permanent.
Besides, we should also pay close attention to the unjustifiably complex system of equalizing the budget security of urban and rural settlements, as well as of municipal areas and urban districts, suggested by the law. It may only increase the “opacity” of local budgets and create additional difficulties for the non-goal-oriented use of budget funds. The system also might weaken the responsibility of the authorities of federal subjects and local governments in pursuing the above-mentioned goal, since the latter will not be able to provide coordinated use of unified approaches and the order of equalizing the budget security of urban and rural settlements.
The draft of the federal law “On Entering Changes and Additions to the Budget Code of the Russian Federation in the Sphere of Regulating Intergovernmental Relations” specifies the introduction of new principles of regulating intergovernmental relations, as well as changes in distributing incomes between different levels of the RF budget system.
The draft suggests introducing changes to the structure of the Russian budget system, expressed by dividing local budgets in two levels:
- The budgets of municipal areas, urban districts, and inner city territories of cities with federal significance
- The budgets of urban and rural settlements.
It is worth noting that the bill uses the new concept of “expenditure obligations” and defines the rights and duties of public authorities of different levels.
The expenditure obligations of a municipal government emerge as a result of the adoption of legislation concerning locally important issues by local organs of self-government, as well as through municipal governments’ agreements on the issue. The expenditure obligations are determined independently by local self-government organs and are executed at from their own incomes and sources of deficiency payments to the local budgets.
When their local self-government organs administer their separate state powers, municipal governments receive “imputed” expenditures which will have to be covered at the expense of subventions from a higher level of the Russian budget system.
According to the bill, rates of deductions from federal and regional taxes and fees, determined by authorities at higher levels, must be permanent and respectively unified for all settlements and municipal areas. The budget law makes it illegal to set deduction rates for one fiscal year or for a certain limited duration. Analogous requirements are applied to the deduction rates set by municipal areas in regard to local taxes and fees directed to the budgets of settlements.
We have to note, though, that differentiated deduction rates set for local budgets are allowed only in regard to a certain part of individual income tax revenues.
The newly revised chapter 16 of the Budget Code of the Russian Federation suggests equalizing budget security at the expense of forming a regional fund of financial support to the settlements. Grants-in-aid from that fund would be distributed among settlements’ budgets on per capita basis.
At the same time, per capita equalizing does not take into account the differences in tax potential and expenditure obligations of municipal governments and, therefore, cannot sufficiently equalize the budget security of settlements. Therefore, in addition to the regional fund of financial support of the settlements, the above-mentioned bill also provides for creating area funds of financial support to the settlements within the budgets of municipal areas. Grants-in-aid from those funds will be given to the settlements whose estimated budget security does not exceed the level set as a criterion for equalizing budget security for this municipal area’s settlements. The estimated budget security of settlements is determined by a proportion of tax revenues per inhabitant.
Based on an analogous mechanism, the budget security of municipal areas (urban districts) is equalized through aid granted from the regional fund of financial support to the municipal areas (urban districts). In addition to that, some grants from the above-mentioned fund may be given to each municipal area on a per capita basis in accordance with the unified method. Besides, the mentioned grants can be substituted completely or partially by additional deduction rates on individual income taxes.
It is important to note that creating regional and district funds of financial support to the settlements will, on the one hand, create independence guarantees for the settlements’ budgets, but on the other hand, it will not always allow for effective equalizing of the settlements’ budget security. In this connection, it would be more reasonable to use a more simple and effective mechanism which is also understandable to the people of financial aid to local budgets: federal subjects would execute equalizing budget security of their municipal areas and urban districts, while municipal areas would equalize the budget security of urban and rural settlements.
In addition to that, it is possible to use a compromising variant, i.e. delegate the powers of a federal subject in equalizing settlements’ budget security to municipal areas. The latter is provided by Clause 6 of Article 26 of the Federal Law “On Entering Changes and Additions to the Federal Law ‘On General Principles of the Organization of Legislative (Representative) and Executive Organs of Federal Subjects’ Authorities’” (Federal Law #95 from July 4, 2003). Besides, according to Subclause 20 of Clause 1 of Article 15 of the Federal Law “On General Principles of Organization of Local Self-Government in the Russian Federation,” municipal areas execute the equalization of budget security of their settlements at the expense of municipal areas’ budget funds.
In addition, the newly revised Budget Code provides for the possibility of making it legal for local municipal governments of federal subjects to have the power to calculate and grant aid to settlements which are supposed to be funded from the budget subventions granted by the regional compensations fund. In this case, there will not be formed a regional fund of financial support in the area of granting aid to settlements, while the aid to the settlements, scheduled to be transferred to the budgets of settlements, will be included in the regional compensation fund and distributed among the budgets of municipal areas as subventions on per capita basis.
The suggested order of equalizing budget security of urban and rural settlements, as well as municipal areas and urban districts, also needs to be corrected. It is presupposed that if the estimated budget security of a settlement or municipal area (urban district), before equalizing its estimated budget security, exceeds by two times and more the average level in the given federal subject, the federal subject law provides for transferring subventions from the budget of a given settlement (municipal area, urban district) to the regional fund of financial support to the settlements (regional fund of financial support to municipal areas, urban districts).
It seems that the use of the newly-legislated mechanism of “negative transfers” (that is, subventions, transferred from the budgets of settlements to the higher level budgets in the case of high estimated budget security of a given settlement (municipal area, urban district) compared to the average budget security in the given federal subject) reduces the stimuli for building a tax base in municipal governments and impairs the investment climate.
In this connection, it would be necessary to increase the importance of this criterion and set a possibility for differentiating its size. An estimated degree of inequality of municipal budget security in all revenues including financial aid within federal subjects demonstrates that the proportion of revenues of the richest municipality exceeding the average level of budget security equals 1.35-2 times in 33 subjects of the Russian Federation, 2-5 times in 23 federal subjects, and more than 5 times in 8 federal subjects (according to information from the Center on Fiscal Policy). These data demonstrate that it would be more reasonable to introduce a mechanism of step equalizing of municipal budget security, since it is necessary to withhold more surplus revenues gained by natural interest or other factors independent on the economic activity of municipalities, in order to raise budget security in municipalities which do not possess such opportunities due to objective reasons.
We consider that the size of deductions cannot exceed 50% of the estimated surplus of the settlement’s (municipal area’s, urban district’s) revenues per fiscal year; neither can it be twice as much as the average level of budget security in the given federal subject, nor, above that, 25% of exceeded surplus revenues of the fivefold average level of estimated budget security across the federal subject.
Besides, it would be reasonable to change the suggested procedure and the role of negative transfers in the mechanism of equalizing budget security in municipal governments. It would be more beneficial to turn it into a habitual and currently used way of centralizing parts of income from local taxes and fees or lowering municipal governments’ rates of deductions from federal and regional taxes and fees and thus shut out the opportunity to transfer subventions from the budgets of municipal governments.
However, the draft of the new revision of the Budget Code accounts for the fact that in case municipal governments under the “negative transfer” regime do not fulfill their requirements to transfer subventions in the budget of a federal subject, the law of the federal subject provides for lowering rates of deductions from federal and regional taxes for the given municipal government and/or centralizing a portion of its local tax revenues at a level which would provide funds in the amount of the given subvention for the budget of a federal subject.
Besides, it is not specified which kinds of revenue taxes of local budgets should be deducted by a federal subject in the first place (deductions from federal and regional taxes and fees or revenues from local taxes and fees). Taking out tax and fee revenue income from local budgets violates the principle of independence of local budgets stated by the Constitution of the Russian Federation and the Budget Code, deprives municipal governments of stimuli to grow the local tax base, and decreases its investment attractiveness.
In this connection, it would be necessary to give municipal governments which do not fulfill the requirements of the “negative transfer” regime the right to lower deduction rates from federal and regional taxes and fees, since local representative organs do not have the power to establish and charge the above-mentioned tax revenues. In case lowered deduction rates do not produce the funds for the local budget equal to the established subventions, the remaining sum can be obtained through reducing financial aid given from regional budgets to the budgets of local municipal governments.
Further on, the draft of the newly revised Budget Code provides for establishing temporary financial administration. Such an executive organ of a federal subject is supposed to prepare and administer measures on reconstructing the paying capacity of municipal governments, as well as to assist authorities of the federal subjects in administering certain budgetary powers of local self-government and execute and/or control the local administration’s execution of certain budget powers.
Accordingly, the Federal law “On General Principles of Organization of Local Self-Government in the Russian Federation” states that the temporary transfer of local governments’ powers to the authorities of the federal subjects is reasonable only in the case of overdue debts (caused by action or inaction of local self-government organs and defined by the procedures provided by the Budget Code of the RF) of municipal governments exceeding 30% of the municipal budget revenues in the fiscal year and/or delinquency of municipal governments in executing their budget obligations exceeding 40% of budgetary allocations in the fiscal year, given that the budgetary obligations of the federal budget and the budgets of the federal subjects in regard to the budgets of the mentioned municipal governments have been executed properly.
Besides, it is provided that in certain cases provided by federal law, the temporary financial administration will present the changes and additions made to a municipal budget during the fiscal year and proposed municipal budget for the following fiscal year to the higher authorities of the federal subject to be enacted by the law of the federal subject.
This provision of the law gives the temporary financial administration the powers which generally lie in the exclusive competence of local representative organs. Therefore, it needs to be corrected, taking into account the fact that Clause 4 of Article 112 of the Budget Code states that in case a municipal government cannot service and pay off its debts, the authorized organ of power of a federal subject may transfer the execution of the local budget (but not its approval) to the control of the organ executing the budget of the federal subject.
Despite some disadvantages, these provisions allow for the establishment of stable and long-term principles of forming intergovernmental relations, improving the economic conditions of municipal governments, and creating conditions for their socioeconomic development in the long-term perspective.
At the same time, the draft of the federal law “On Entering Changes and Additions to the Budget Code of the Russian Federation in the Sphere of Regulating Intergovernmental Relations” has other faults in addition to those mentioned above.
The fact that the bill states that federal legislation will not be able to establish the distribution of regional tax revenues among the budgets of federal subjects and local budgets is very dubious. For instance, it would be necessary to restore the 50% rate of deductions from the organizations’ property taxes to local budgets.
The most significant local budget revenues will come from the individual income tax (322.3 billion rubles or 66% of local budget revenues). They will be distributed in accordance with the permanent rates (set by the Budget Code) among the budgets of settlements (15%) and budgets of municipal areas (15%). Over that, the federal subjects must establish unified and/or additional rates of deductions from individual income tax to the local budgets based on the enrolment in the local budgets of no less than 20% of the mentioned tax deducted from the tax incomes of a federal subject’s consolidated budget.
In addition to that, it has not been determined which rates and methods should guide the distribution of the indicated 20% of individual income tax revenues among the budgets of settlements and municipal areas.
The authorities of the federal subjects are given an opportunity to introduce both unified (permanent for an unlimited term) and additional (temporary for a fiscal year) provisions of deductions to the local budgets from the mentioned 20% of individual income tax revenues. In addition to that, this provision impairs the financial condition of municipal governments even worse than the current federal law “On the Financial Bases of Local Self-Government in the Russian Federation” (which provides that a portion of the income tax – on an average, no less than 50% across a federal subject – goes to the incomes of local budgets, i.e. it must be permanently assigned to the local budgets).
In this connection, we consider that at least 20% of personal income tax funds should be distributed among local budgets after the established unified (unlimited term of action), rather than additional (expiring after a year) tax rates.
The next issue is connected with the fact that, according to the draft of the newly revised Budget Code, settlements are obliged to transfer subventions to the municipal budget for solving local issues of inter-municipal nature. The goals, procedures of transfer, accounting and use of those subventions are set by the statute of a municipal area and/or by legislation issued by the representative organ of a municipal area. We have already mentioned (when discussing the new edition of the Federal law “On General Principles of Local Self-Government Organization in the Russian Federation”) that the ability to administer subventions is granted only to those municipal areas which form their representative organs from the heads of settlements within the municipal area and from delegates from representative organs of those settlements.
The fact that the federal law and the laws of federal subjects do not clearly state the requirements and criteria for calculating the amount of those subventions and municipal areas’ powers to establish them can cause unjustifiably high rates of deductions from the settlements’ budgets to the budgets of municipal areas, and it can substantially impair their financial state and reduce their ability to fund their own local necessities.
Besides, making the ability to transfer subventions to municipal areas’ budgets dependent on the means by which their representative organs are formed creates revenue base advantages for some municipal areas over other municipal areas.
It should also be mentioned that the Budget Code of the Russian Federation has been supplemented with the new Article 215.1, which provides that the cash servicing of budget execution is administered by the Federal Treasury opening accounts in the Central Bank of the Russian Federation.
However, the latter statement is not in accordance with Articles 71, 72, 73 and Part 1 of Article 132 of the Russian Constitution, which state that the subjects of the Russian Federation and municipal governments execute their budget administration powers independently.
According to Part 1 of Article 132 of the Russian Constitution, local self-government organs administer their local self-government organs independently. Besides, transferring the power of cash servicing of local budgets to the Federal Treasury does not correspond with Article 12 of the Russian Constitution, which provides that local self-government organs are not a part of the system of organs of public authority.
It is also important to take into account that some federal subjects and municipal governments have formed their own treasuries, thus having spent considerable financial funds from the federal subjects’ budgets and local budgets.
In addition to that, according to the draft federal law “On Entering Changes and Additions to the Budget Code of the Russian Federation in the Sphere of Regulating Intergovernmental Relations,” the statement concerning the provision by the Federal Treasury of cash services to the budget system of the Russian Federation comes into effect on January 1, 2005. From that moment on, all federal subjects and municipal governments must receive cash services for execution of their budgets from the Federal Treasury. Therefore, treasuries created by federal subjects or municipal governments before January 1, 2005, must be abolished, or they will not be able to execute their powers.
In this connection, federal subjects and municipal governments should be given the right to form their own treasury organs or make agreements with the federal treasury in regard to the cash servicing of their budget administrations by federal treasury organs.
The optimal assignment of tax revenues to the budgets of all levels based on rules concerning the distribution of tax revenues among budget system levels set by the Budget Code of the RF does not solve the problem of conformity between the revenues and expenditure obligations of the budgets.
It is necessary to minimize the number of regulations concerning federal and regional taxes and to increase the number of taxes assigned to a certain level of the budget system according to the principle “one tax – one budget.” Besides, it is important that local budgets be formed at the expense of local (mostly property) taxes in order to ensure the real tax autonomy of local self-government organs.
In order to solve these questions, during the Autumn Session of 2003, the State Duma of the RF read the first time the draft of the federal law “On Entering Changes and Additions to the Tax Code of the Russian Federation and Recognizing the Losing of Effect of the RF Law ‘On the Bases of the Tax System in the Russian Federation’” which is also supposed to ensure implementation of the reform of federal relations and local self-government.
The expenditure obligations of local budgets in the first year of reform are reduced, according to the reform’s calculations, by 321.2 billion rubles and will gain 960 billion rubles. Financing of the expenditures of local governments under the new conditions will be provided at the expense of 483.9 rubles in tax revenues to local budgets.
It is suggested to delegate 50% of personal income tax revenues to local budgets (including the 20% of mandatory regions’ transfer), 60% of single tax revenues from taxes, using the simplified taxation system, by small businesses; the single tax on imputed earnings for certain kinds of activity; the single agricultural tax; and 100% of the revenues from personal property taxes and land taxes.
Conceptually, assigning tax revenues to local budgets means transferring more equally-distributed and stable sources of income among local and regional budgets as well as moving the tax burden to the direct consumers of public goods and services offered by local authorities. These requirements are met by such taxes as the personal property tax, the land tax and the personal income tax.
The problem is that the personal property tax (5.64 billion rubles) and land tax (54.2 billion rubles) cannot cover the largest part of the expenditure obligations of local budgets due to the lack of developed real estate markets on most municipal governments’ territories. Besides, the suggested inventory of property in the first half of 2004 will hardly allow for better personal property tax collection.
It is also important to keep in mind that total income taxes assigned to local budgets (the single tax for using the simplified taxation system for small businesses, the single tax on imputed earnings for certain kinds of activity, and the single agricultural tax) are not sufficiently evenly distributed, stable and immobile sources of income; that is, they do not meet the main criteria of being assigned to the local budgets.
Under such conditions, when the personal income tax deduction rate assigned to local budgets makes only 50% (322.3 billion rubles) combined with the above-mentioned revenues from income taxes (59.84 billion rubles), as well as with revenues from total income taxes (39.795 billion rubles), the transport tax (50.2 billion rubles) and the sales tax (10.3 billion rubles); therefore, summed tax revenues (482.3 billion rubles) will cover only 50.2% of expenditure obligations (960 billion rubles) of the local budgets.
The sum not provided for (478 billion rubles) can be obtained either at the expense of the non-tax income of local budgets or at the expense of financial aid from budgets of higher levels.
In the meantime, non-tax income can be significant income sources only in the 100-120 largest municipal governments in the Russian Federation. However, the absolute majority (out of a possible 30,000) of municipal governments are going to be formed on the basis of small urban and rural settlements with a rather low level of socioeconomic development, and therefore, with low liquidity of property and demand for land resources.
Thus, the sum necessary to cover the expenditures of local budgets must be searched for in regional budgets and be transferred to local budgets as rates of deductions from federal and regional taxes or as grants-in-aid and subventions. It should also be taken into consideration that legislated subventions for financing education and housing subsidies from the budgets of federal subjects to the local budgets comprise 254.7 billion rubles.
Therefore, it is doubtful whether the tax and non-tax revenues of local budgets will be sufficient to cover their expenditures in full.
Under such conditions, local budgets should not discard production duty as a source of their income.
However, the above-mentioned bill suggests that the rates of profit taxes on organizations should vary among budgets of different levels: the federal budget will receive tax payments with a tax rate of 5%, while the budgets of federal subjects will obtain tax payments at a 19% rate. The provision suggesting that local budgets be credited taxes at the rate of 2% was excluded, since the latter would cause local budgets to lose approximately 53.6 billion rubles.
Preserving the tax rate (2%) of profit taxes on organizations paid to local budgets is necessary to stimulate the development of local production and attract investments in the economy of municipal governments.
It is important to note that as a result of a number of Tax Code articles suggested in the new revision, local taxes will include the individual income tax, the land tax, the transport tax, and the sales tax. The advertisement tax has been abolished; local license taxes have been transferred to the area of non-tax income of the federal budget, and a new payment – the sales fee– has been introduced.
In our opinion, substituting the advertisement tax with a sales fee is not of equal worth in the sphere of local taxes, as a tax is a periodical mandatory payment, while a fee is a one-time mandatory charge. Therefore, an advertisement tax is a more valid guarantee of regular payments to local budgets than is a sales fee. Besides, sales fee had not been supported by legislation yet; neither had the conditions of collecting it been defined.
Thus, the number of local taxes and fees is reduced from 5 to 4, compared to the number set by Article 15 of the active variant of the Tax Code of the Russian Federation. In addition to that, the number of federal taxes is growing unjustifiably at the expense of reducing the number of regional and local taxes.
The draft of the new revision of the Tax Code does not bring its provisions in accordance with the Program of Development of Budget Federalism in the Russian Federation in the Period Until 2005, the latter representing a conception of reform in federal relations and local self-government.
For instance, the property tax on organizations is set as a regional tax; total income taxes are not given local tax status, either. The list of taxes does not include the real estate tax, which in perspective should be the primary income source for local budgets, according to the above-mentioned Program. The validity of assigning the real estate tax to local governments was justified by the stability of payments from that tax, equal distribution and low mobility of the tax base and economic efficiency. At the same time, it should be mentioned that local governments can influence the formation of a tax base based on this tax and can effectively control real estate activities, which will promote better tax collection.
In the above-mentioned bill, property taxes on organizations have a regional tax status. At the same time, according to chapter 30, “Organizations’ Property Tax” of the Tax Code, revenues from this tax will be directed only to the budgets of federal subjects, while parts of revenues will possibly be directed further on to the budgets of municipal governments. According to current legislation, these revenues are split in half between the mentioned budgets.
In this connection and based on the Program of Development of Budget Federalism in the Russian Federation in the Period Until 2005, it is important to make the property tax on organizations a local tax, as it is justifiable to violate the principle of social justice (irregular distribution of tax base) for the sake of creating economic stimuli.
Making the property tax on organizations a local tax would permit an increase in the tax revenues of local budgets of approximately 197.8 billion rubles. Merely adding it to the budgets of settlements would cover only 82% (240.9 billion rubles) of settlements’ expenditure obligations.
We should note that the bill on introducing changes and additions to the tax legislation does not classify local taxes as local taxes of settlements and local taxes of municipal areas (new revision of Article 15 of the Tax Code), which would be necessary in accordance with the creation of two budget levels in the budget system of the Russian Federation – the budgets of municipal areas (urban districts, inner city territories of cities of federal importance) and the budgets of urban and rural settlements.
This circumstance does not allow the implementation of the concept “one tax – one budget” based on the reform of federal relations and local self-government and allows for setting rates for the distribution of revenue from the same local taxes both to the budgets of settlements and municipal areas.
Under these conditions, it is difficult to guarantee that local tax revenues will cover the expenditures of local budgets of different levels in case of a change in the tax potential of a territory or an unstable local tax base.
Besides, the bill has a number of provisions which restrict the tax powers of local governments. This decreases the tax autonomy of municipal governments and is caused by the fact that the introduction of tax autonomy status means that local representative organs can set tax rates for local taxes as well as specify the objects of taxation, and, in perspective, introduce local markups to federal and regional taxes.
It has great importance, since creating conditions for municipal governments to gain tax autonomy status and thus ensure the freedom of local tax decisions is a crucial task of local self-government reform.
* Liudmila Ivanovna Pronina, Doctor of Science (economics), consultant on issues of local self-government in the Committee of the State Duma of the RF.
 Estimated by the Center of fiscal policy by the data on 2001.