Local Business Tax Burden on Municipalities Increased Tenfold, but Record Revenue Followed Bleeding
At first glance, the local business tax revenue of county-level cities in Hungary saw an astonishing increase between 2022 and 2023.
However, it wasn't due to a significant uptick in economic activities.
The local business tax revenue of county-level cities increased by an average of 42 percent between 2022 and 2023, with some municipalities experiencing a 60-70 percent surge. One reason for this hike is the legislative change that revoked measures introduced during the coronavirus pandemic, explained Gábor Kozma, a geographer and university professor at the University of Debrecen.
Firstly, in 2023, the so-called "HIPA-halving" ended: while in 2021 and 2022, for primarily small and medium-sized enterprises, the maximum tax rate of the local business tax could only be 1 percent instead of the 2 percent stipulated by the local tax law, in 2023, local municipal councils were again able to set the maximum tax rate within the framework of local tax legislation. Secondly, in 2023, municipal councils could decide to raise the tax rate, which also resulted in increased tax revenue this was elaborated by the head of the Department of Social Geography and Regional Development Planning at the University of Debrecen's Institute of Earth Sciences. However, only Kecskemét among the county-level cities took advantage of the latter option. The increase was also influenced by the growth of the Hungarian economy in 2022. That year, the GDP grew by 4.6 percent. The economic performance of businesses in 2023, based on their financial results from 2022, also reflected in the amount of local business tax paid, he added.
Kozma believes that it can only be said with certain limitations that municipalities compete with each other for new investors and retaining local businesses by setting this type of tax. Around 60 percent of domestic municipalities have set the local business tax rate at the maximum 2 percent, which they could lower to create a competitive environment both in theory and practice. Among the taxes collected by municipalities (building, plot, communal, and tourism tax), the local business tax is of paramount importance since it accounts for the highest revenue in towns and villages with industries, commerce, and services.
Unlike other county-level cities, only Győr established a lower HIPA rate at 1.6 percent. Nonetheless, this north-western industrial hub has the second-highest local business tax revenue after Budapest. Last year it amounted to 29.8 billion forints, marking a 136 percent increase from 2022. Surprisingly, Debrecen, the second-highest local business tax revenue generator among the rural cities, managed to outperform strong industrial contenders like Székesfehérvár, which had a revenue of more than 26.6 billion forints. This comes as a surprise since major investments such as the CATL battery factory and the German car manufacturer BMW are still underway in Debrecen, with production yet to start. This also signifies that the city's current 28.7 billion forint revenue from local business tax could significantly rise in the near future.
According to Kozma, the significant increase in Debrecen's revenue was undoubtedly influenced by major infrastructural developments and factory constructions (including SEMCORP, BMW) that took place in 2022 in both the North-West Economic Zone and the Southern Industrial Park.
The relatively low annual HIPA revenue of Esztergom remains a puzzle. Despite setting its rate at the maximum 2 percent, its revenue barely exceeded 5.5 billion forints, showing no increase from 2022. Suzuki manufactures in the city, a company that achieved a revenue of 858.5 billion forints in 2022, ranking as the 19th largest revenue-generating company in the country. Yet, cities like Sopron, Békéscsaba, and Eger surpass it in HIPA revenue.
"The growth in HIPA will be significantly less in 2024 compared to the previous year," said Gábor Kozma. This is partly because the positive effects of ending the "HIPA-halving" will no longer apply. Also, the payments in 2024 will primarily reflect the economic performance of 2023, and the economic downturn experienced last year will affect the local business tax. This is evidenced by the fact that most larger cities have only planned for a maximum 5 percent increase in local business tax revenue from 2023 to 2024. Debrecen is the sole exception with its approximate 20 percent projected increase.
State Redistribution Through Solidarity Contribution Quadruples Burden on Affluent Municipalities
This year, the state will withdraw 307.6 billion forints from wealthier municipalities under the guise of a municipal solidarity contribution, or solidarity tax. This burden was introduced by the government in 2017 when it withdrew a total of 26.5 billion forints from a few dozen truly affluent municipalities. Since then, the withdrawal amount has increased more than tenfold from its original sum. Initially, the idea was for municipalities with significant industrial and/or service sectors, thereby generating substantial local business tax revenue, to contribute a small portion of their income to the budget. The government intended to use the collected funds to support other, poorer municipalities. While in 2017, the tax was levied on a few dozen municipalities, including the capital city, Százhalombatta, Székesfehérvár, Paks, Veresegyház, Budaörs, and other major rural cities and county capitals, some estimates now suggest that up to a quarter of all municipalities could be affected by this payment.
Not only has the number of taxed entities increased, but the amount of tax withdrawn has also risen significantly as the government quickly became fond of this free money. Moreover, the 2019 municipal elections saw opposition advancements in many of the major cities, some of which were significant contributors. During the COVID-19 pandemic, the government cut larger municipalities' local business tax revenues with concessions to businesses and opted to significantly increase the solidarity tax to cripple opposition-led municipalities starting from 2021. The solidarity tax is imposed uniformly on municipalities, but the distribution of support does not follow the same principle of equality. A good or bad example of this is Debrecen, led by Fidesz, which, despite being a high-tax municipality and thus liable for the solidarity tax, receives several times the amount it contributes.
The imposition sparked outrage among the largest taxpayers. First, opposition-led Budapest filed an administrative lawsuit against the government, followed by Budaörs. Both cities cite the Fundamental Law, which states that no municipality can become a net payer. According to them, this is precisely the situation they find themselves in, as the support received for their mandatory tasks is now less than the tax withdrawn - despite the fact that the state can only prescribe mandatory tasks if it also provides the necessary funding. No final judgment has been delivered in these cases yet, resulting in the Treasury garnishing the Budapest municipality's accounts on multiple occasions. The punitive nature of the tax is evident from its inception in 2017 when the capital, led by Mayor István Tarlós, had to pay 5 billion forints in solidarity tax to the budget, a figure that has risen to 58 billion forints this year, according to the Municipality of Budapest.
As the continuous increase in the solidarity tax significantly alleviated the government's burdens, the collected tax grew tenfold from 2017 to 2024, while municipal support from the budget only rose by 48 percent.
The local business tax revenue of county-level cities increased by an average of 42 percent between 2022 and 2023, with some municipalities experiencing a 60-70 percent surge. One reason for this hike is the legislative change that revoked measures introduced during the coronavirus pandemic, explained Gábor Kozma, a geographer and university professor at the University of Debrecen.
Firstly, in 2023, the so-called "HIPA-halving" ended: while in 2021 and 2022, for primarily small and medium-sized enterprises, the maximum tax rate of the local business tax could only be 1 percent instead of the 2 percent stipulated by the local tax law, in 2023, local municipal councils were again able to set the maximum tax rate within the framework of local tax legislation. Secondly, in 2023, municipal councils could decide to raise the tax rate, which also resulted in increased tax revenue this was elaborated by the head of the Department of Social Geography and Regional Development Planning at the University of Debrecen's Institute of Earth Sciences. However, only Kecskemét among the county-level cities took advantage of the latter option. The increase was also influenced by the growth of the Hungarian economy in 2022. That year, the GDP grew by 4.6 percent. The economic performance of businesses in 2023, based on their financial results from 2022, also reflected in the amount of local business tax paid, he added.
Kozma believes that it can only be said with certain limitations that municipalities compete with each other for new investors and retaining local businesses by setting this type of tax. Around 60 percent of domestic municipalities have set the local business tax rate at the maximum 2 percent, which they could lower to create a competitive environment both in theory and practice. Among the taxes collected by municipalities (building, plot, communal, and tourism tax), the local business tax is of paramount importance since it accounts for the highest revenue in towns and villages with industries, commerce, and services.
Unlike other county-level cities, only Győr established a lower HIPA rate at 1.6 percent. Nonetheless, this north-western industrial hub has the second-highest local business tax revenue after Budapest. Last year it amounted to 29.8 billion forints, marking a 136 percent increase from 2022. Surprisingly, Debrecen, the second-highest local business tax revenue generator among the rural cities, managed to outperform strong industrial contenders like Székesfehérvár, which had a revenue of more than 26.6 billion forints. This comes as a surprise since major investments such as the CATL battery factory and the German car manufacturer BMW are still underway in Debrecen, with production yet to start. This also signifies that the city's current 28.7 billion forint revenue from local business tax could significantly rise in the near future.
According to Kozma, the significant increase in Debrecen's revenue was undoubtedly influenced by major infrastructural developments and factory constructions (including SEMCORP, BMW) that took place in 2022 in both the North-West Economic Zone and the Southern Industrial Park.
The relatively low annual HIPA revenue of Esztergom remains a puzzle. Despite setting its rate at the maximum 2 percent, its revenue barely exceeded 5.5 billion forints, showing no increase from 2022. Suzuki manufactures in the city, a company that achieved a revenue of 858.5 billion forints in 2022, ranking as the 19th largest revenue-generating company in the country. Yet, cities like Sopron, Békéscsaba, and Eger surpass it in HIPA revenue.
"The growth in HIPA will be significantly less in 2024 compared to the previous year," said Gábor Kozma. This is partly because the positive effects of ending the "HIPA-halving" will no longer apply. Also, the payments in 2024 will primarily reflect the economic performance of 2023, and the economic downturn experienced last year will affect the local business tax. This is evidenced by the fact that most larger cities have only planned for a maximum 5 percent increase in local business tax revenue from 2023 to 2024. Debrecen is the sole exception with its approximate 20 percent projected increase.
State Redistribution Through Solidarity Contribution Quadruples Burden on Affluent Municipalities
This year, the state will withdraw 307.6 billion forints from wealthier municipalities under the guise of a municipal solidarity contribution, or solidarity tax. This burden was introduced by the government in 2017 when it withdrew a total of 26.5 billion forints from a few dozen truly affluent municipalities. Since then, the withdrawal amount has increased more than tenfold from its original sum. Initially, the idea was for municipalities with significant industrial and/or service sectors, thereby generating substantial local business tax revenue, to contribute a small portion of their income to the budget. The government intended to use the collected funds to support other, poorer municipalities. While in 2017, the tax was levied on a few dozen municipalities, including the capital city, Százhalombatta, Székesfehérvár, Paks, Veresegyház, Budaörs, and other major rural cities and county capitals, some estimates now suggest that up to a quarter of all municipalities could be affected by this payment.
Not only has the number of taxed entities increased, but the amount of tax withdrawn has also risen significantly as the government quickly became fond of this free money. Moreover, the 2019 municipal elections saw opposition advancements in many of the major cities, some of which were significant contributors. During the COVID-19 pandemic, the government cut larger municipalities' local business tax revenues with concessions to businesses and opted to significantly increase the solidarity tax to cripple opposition-led municipalities starting from 2021. The solidarity tax is imposed uniformly on municipalities, but the distribution of support does not follow the same principle of equality. A good or bad example of this is Debrecen, led by Fidesz, which, despite being a high-tax municipality and thus liable for the solidarity tax, receives several times the amount it contributes.
The imposition sparked outrage among the largest taxpayers. First, opposition-led Budapest filed an administrative lawsuit against the government, followed by Budaörs. Both cities cite the Fundamental Law, which states that no municipality can become a net payer. According to them, this is precisely the situation they find themselves in, as the support received for their mandatory tasks is now less than the tax withdrawn - despite the fact that the state can only prescribe mandatory tasks if it also provides the necessary funding. No final judgment has been delivered in these cases yet, resulting in the Treasury garnishing the Budapest municipality's accounts on multiple occasions. The punitive nature of the tax is evident from its inception in 2017 when the capital, led by Mayor István Tarlós, had to pay 5 billion forints in solidarity tax to the budget, a figure that has risen to 58 billion forints this year, according to the Municipality of Budapest.
As the continuous increase in the solidarity tax significantly alleviated the government's burdens, the collected tax grew tenfold from 2017 to 2024, while municipal support from the budget only rose by 48 percent.
Translation:
Translated by AI
