Intra-budgetary redistribution of the Personal Income Tax in Lithuania is aimed at providing financial support for economically weaker municipalities. Tax revenue from the largest and strongest municipalities is used to support the weaker ones. On the one hand, redistribution is beneficial for economically weaker municipalities that may use additional funding for performing its functions. Nevertheless, redistribution creates problems for the donor municipalities that have to bequeath a significant part of the revenue from the Personal Income Tax and cannot use it for their own needs. 

The presented analysis is aimed at measuring level differences of intra-budgetary redistribution of the Personal Income Tax across municipalities as well as identifying the major problems created by this process.

SUMMARY

Intra-budgetary redistribution of the Personal Income Tax is achieved by funnelling a percentage of tax revenue into the State Treasury, and reallocating it in order to bolster weaker municipalities. This tax revenue originates from the economically strongest municipalities.

In the majority of municipalities, redistribution equals to at least 20% of the total budget. In Alytus District, Neringa, and Kalvarija, redistribution takes up a one third of the municipal budget. This implies that weaker municipalities are heavily dependent on additional revenue from the Personal Income Tax redistribution.

There are only three donor city municipalities in Lithuania: Vilnius, Kaunas and Klaipėda. Therefore, it is estimated that in 2015 each of these municipalities will respectively lose 191, 10 and 8 million EUR of their Personal Income Tax revenue.

Intra-budgetary redistribution of the Personal Income Tax creates the following problems:

• After redistribution, donor municipalities face less favourable fiscal fortunes than the supported municipalities.

• The incentives for economically weaker municipalities to seek their own policies to improve their economic, financial and social situation are diminishing, because such an improvement may result in a loss of additional Personal Income Tax revenue from redistribution.

• The criterion of determination on the proportion of the Personal Income Tax allocation across municipalities is unclear and therefore, intra-budgetary redistribution is disproportionate.

Download the full analysis here: Redistribution_across_Municipalities