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What is the danger of withdrawing “military” personal income tax from the budgets of territorial communities? Blog by Iryna Hrymak

Oct 26, 2023

The Verkhovna Rada has sent back for a second reading the draft law on the removal of military personal income tax from local budgets from 1 October 2023. Amendments to the draft law are to be introduced within a short timeframe.

The draft law did not receive the required number of votes in the parliament, as most MPs, including those with majoritarian leanings, understand the unpopularity and negative consequences of this government initiative, even after the amendments made to the draft law by the relevant parliamentary committee, which, as the legislators assured, should compensate communities for the loss of military personal income tax. The example of the Lviv region illustrates the risks of transferring military personal income tax from local to state budgets. Lawmakers tried to reassure the leaders of large communities, which are mostly cities, that they would not be deprived of the reverse subsidy next year. For the same communities that received reverse payments in previous years, state subventions are provided that will allow them to form local budgets next year at the level of 2021. However, can we rely on the government’s promises to compensate for the losses of local budgets quickly and in full? After all, next year’s state budget deficit is enormous, and it is not known how much international aid will be available. Therefore, compensation to communities may turn into a long-term loan to the state, with no timeframe for repayment. In the Lviv region, even with the proposed compensation, the average decrease in local budgets in 2024 will be 15% compared to the budgets of 2023. Of the 73 communities in Lviv Oblast, almost half will have below-average revenues to the general budget fund. And in several communities with military units on their territory, these revenues will fall by 50-70%. Obviously, the government understands the scenario, and therefore has provided in the revised draft law for the possibility for village and town councils to make internal and external borrowings with the approval of the Ministry of Finance. So far, this option is only available to urban communities. However, they did not bother to train local government officials to use these new financial instruments, nor did they define the conditions that would make such loans and borrowings attractive to small communities. Therefore, it is to be expected that most communities in such situations will cut spending on local programmes, including those related to defence and assistance to the military. For example, in the Novorozdilska community, next year, expenditures on the Programme to Support Defenders are proposed to be reduced from UAH 1,265.8 thousand in 2023 to UAH 89 thousand in 2024. The lawmakers also proposed to use the balances on the accounts of local governments in 2023 for the treatment and rehabilitation of people affected by Russian aggression. This is a good initiative, but it should be borne in mind that the balances on the accounts at the end of the year are usually funds that were included in the community’s expenses, but for some reason they could not be paid out. As a result, communities will face unresolved problems next year, most of which are important to their residents. In addition, this initiative will not fundamentally change the situation with the lack of state funding for rehabilitation services for the military and war victims, despite the declared increase in funding for the healthcare sector, which will be largely “eaten up” by another government initiative – an increase in the minimum wage. This is primarily about medical rehabilitation. The Lviv Regional Council once appealed to the government with a proposal to change approaches to financing medical rehabilitation for the military. The point is that the medical care provided by Government Resolution No. 1464 of 2022 and the NHSU Medical Guarantee Programme does not cover the needs of either servicemen who need rehabilitation, recovery and are waiting for prosthetics or the hospitals that provide this care. In addition, the period of inpatient rehabilitation provided by this service is too short. Therefore, after the inpatient treatment period is over, doctors face a difficult choice: to send the soldiers home or to continue their treatment on a paid basis. The third option is to continue treating them free of charge, knowing that the NHSU will not pay for it. We can expect that next year local programmes for medical rehabilitation of servicemen will appear, which would include additional funds to the NHSU packages for inpatient rehabilitation. However, funding these programmes only from budget balances significantly limits their effectiveness and efficiency. Further attempts to “push through” the adoption of draft law #10037, combined with some other decisions of the state authorities, are creating an alarming trend of consistent restriction of the powers of local self-government under martial law, and the destruction of the achievements of the decentralisation reform. After all, decentralisation has made communities reliable partners for the Ukrainian authorities, residents and the military. Now, they are becoming increasingly dependent on the instructions of the state authorities at the centre and on the ground. Relations between the state and local governments are losing transparency and trust. This state of affairs is hardly a partnership.