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 policy brief (in English) Redistribution of Intra-Budgetary Funds across Municipalities