The past few months have seen a debate about whether Budapest should halve its local business tax. There were officials on both sides of the debate, and in late December, the tax measure passed. Explore the debate leading up to the decision and its impact so far.
Idea Behind Halving the Tax
The main argument behind halving the business tax was to support local businesses. Specifically, the idea is if businesses do not have to pay as much in taxes, they will maintain more employees. That, in turn, reduces unemployment.
Arguments Against Halving the Tax
The biggest argument against halving the business tax was the extent to which municipalities rely on it. For municipalities, this is a prime source of revenue. Opponents argued that lowering by 50% the business tax would put public services at risk.
Others argued that the reduced funding in municipalities would give the national government additional power. Essentially, they argued that the lack of available funds would make it easier for the government to pressure cities politically.
Budapest Mayor Is Opposed
Budapest Mayor Gergely Karacsony publicly opposed the proposal from the beginning. He cited issues regarding delivering essential public services to passport holders and shareholders within municipalities.
Instead, Karacsony offered an agreement between the BKIK and Budapest. This agreement would provide small and micro-businesses with a micro-credit line of 2.5 billion forints (or 6.9 million euros). He also announced a voucher scheme in late November. This scheme aims to help businesses with financial difficulties.
Decreasing private equity funds and foundation assets without reducing real estate in municipalities leaves city managers with challenges. Management and directors have to engage in tax planning to better use their investments to serve their residency.
Other Mayors Joined Karacsony
In late December, just after Prime Minister Viktor Orban announced the country would go through with the tax halving, 37 other mayors joined Karacsony in opposition. The mayors of various Budapest districts and Hungarian cities submitted a joint statement urging the government to withdraw the decision. The statement came from the Alliance of Free Cities, the name the mayors gave to their coalition.
They claimed that the move to halve the taxes is not truly about the economic crisis. Instead, it argued that it was a political power play and gained international attention.
Some Compromises in the Change
To acknowledge the concerns of opponents to the tax change and to improve trust, Orban announced that smaller towns would receive government support. This support would be automatically given to towns with less than 25,000 inhabitants. Municipalities larger than this would be evaluated and then receive help on a case-by-case basis.
However, a decree on Dec. 24 showed disparities in the amounts granted to cities based on political parties. Those led by Fidesz received an average grant of 1.4 billion forints (about 3.8 million euros). By contrast, those led by the opposition only received about 30 to 50% of that amount. Furthermore, they are only allowed to use it for specific projects.
When the Change Was Made
Prime Minister Viktor Orban officially announced halving the local business tax of medium and small businesses in late December. The tax change went into effect as of Jan. 1, 2021. Since then, the corporate tax for businesses has been reduced, and the government does not seem to consider more fiduciary debates about it.
The Concerns Continue
Just several days after the business tax adjustment came into force, opponents continued to voice concerns. They highlighted that this was just one of many recent measures that “suffocate” local governments and potentially lead to bankruptcies. In the spring, the government had redirected funds that were in the Pandemic Defence Fund. In November, the national decree for free parking reduced revenues for municipalities.
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