Tax Sharing and Intergovernmental Fiscal Transfers in Bulgaria and Czechia

Sažetak

Adequate fiscal revenues for local governments are a crucial aspect of mean
ingful fiscal decentralisation. As local taxes are often insufficient, many coun
tries have developed complex systems of tax sharing and transfers. Although
numerous systems have been in place for a long time, discussions about potential
changes remain ongoing. These systems are subject to varied and often conflict
ing expectations, with the distinction between tax sharing and transfers frequent
ly being rather unclear. This paper aims to examine and compare the systems of
intergovernmental fiscal transfers and tax sharing in Bulgaria and Czechia, as
well as their evolution. We analyse the factors affecting various types of munic
ipal revenue and the distribution of municipal revenue among individual mu
nicipalities, and propose a model for a tax revenue-sharing system in Bulgaria
based on the Czech formula-driven tax-sharing algorithm. The results of the
OLS regression confirm the pivotal role of population in determining all types
of revenue across both countries. In Bulgaria, we observe a distinct influence of
the structure of municipal territory on different revenue sources. While a higher
proportion of urban land – such as towns and cities – correlates with lower local
taxes, it is associated with higher transfers, indicating preferential treatment for
urban areas in the allocation of transfers. The findings suggest that introducing
a shared tax revenue mechanism in Bulgaria could help mitigate inequalities
between municipalities and significantly enhance expenditure decentralisation.
An analysis of the change in the Gini coefficient in Bulgaria reveals that allo
cating the same resources through a formula-based tax-sharing system, inspired
by the Czech model, rather than the current system of transfers, would result in
a modest reduction in the Gini coefficient.