LOCAL FINANCE IN POLAND IN VIEW OF THE EUROPEAN CHAR-TER OF LOCAL SELF-GOVERNMENT

Chair of Economics

The School of Finance and Computer Sciences in Łódź Faculty of Economics in Kalisz , Poland

agata.bury@interia.pl dr Piotr Bury

Institute of Economics

University of Human and Natural Sciences in Kielce , Poland Faculty of Management and Administration

pibury@onet.pl

LOCAL FINANCE IN POLAND IN VIEW OF THE EUROPEAN CHAR- TER OF LOCAL SELF-GOVERNMENT

Abstract

Local government in Poland exists already 18 years, half of it on the all three tiers of the administrative division i.e. in gminas, poviats and voivodships. The period is long enough to look critically at principles of its activity.

The goal of this paper is to analyze the compatibility of the Polish local government financial system with the guidelines of The European Charter of Local Self-Government, which was ratified by Poland in full in 1993. After a short description of general principles of local government the area of local government finance is discussed, especially the problem of so-called own revenues.

The conclusions could be used to show directions of changes in polish local finance, as well as to serve as guidelines for Ukrainian democracy in creating its local self- governments.

The topic of the paper seems to be especially current in the context of Ukraine’s ef- forts to access the European Union. Sooner or later, Ukraine also will have to face with the provisions of The European Charter of Local Self-Government.

Key words: State and Local Taxation, Subsidies, and Revenues

Introduction

The local government in Poland was reintroduced in 1990, only at the basic level of gminas. It took another 9 years when the second stage of the decentralization process was performed. Since 1999, in a new administrative division, the local government has existed on three tiers, i.e. in gminas, poviats and voivodships (regions); the voivodships being also units of a separate State administration.

The European Charter of Local Self-Government was declared by the member States of the Council of Europe in 1985. Poland ratified it in 1993 and its provisions entered into force on 1 March 1994 ¹ . According to that fact, in the preambula of the Polish constitution

1 To ratify The European Charter of Local Self-Government, a country is obliged to accept at least 20 from 30 its regulations, in which 10 from the indicated most important ones. While a number of Council of Europe members ratified the Charter with some exceptions, Poland accepted it in full.

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67 the principle of subsidiarity was stressed. The participation of local government – that is a community of inhabitants of a territory – in holding a public power, is then confirmed in con- secutive articles of the constitution.

The goal of the paper is to analyze the compatibility of the local government financial system in Poland with the guidelines of the Charter. After the general principles of local gov- ernment its finance is discussed, especially the problem of so-called own revenues, in relation to the mentioned document.

Concept of local self-government

According to the art.3 of The European Charter a local government means the right and the ability of local authorities to regulate and manage a substantial share of public affairs, under their own responsibility and in the interests of the local population, within the limits of the law.

Local government should be exercised by councils or assemblies composed of mem- bers freely elected by secret ballot on the basis of direct, equal and universal elections. These councils or assemblies may have executive organs responsible to them. The Charter doesn’t exclude, however, the possibility of referendum or any other form of direct citizens’ participa- tion in local government.

According to the Polish constitution, all inhabitants of each territorial unit constitute by law a local government community. Local government participates in holding a public power and entitled to it public tasks performs on its own behalf and responsibility (art.16).

On each from the three tiers of local government are councils composed of members elected in democratic elections, as well as subordinated to them council executives, which in poviats and voivodships are collective, while in gminas – one-man. Moreover, citizens keep the right to propose projects of local acts and to decide about important matters via a local referendum.

Powers and responsibility

A local community has full discretion to exercise its initiative with regard to any mat- ter which is not excluded from its competence nor assigned to any other authority, and these powers are in general full and inviolable.

Moreover, the way of performance of tasks delegated to it by a central or regional au- thority can be decided according to the local conditions (art.4 of the Charter).

The art.6 of The European Charter of Local Self-Government recommends that local authorities should determine their own internal administrative structures in order to adapt them to local needs and to ensure effective management.

Local governments should always be consulted in the planning and decision-making processes vital to them, especially in case of changing their boundaries.

Moreover, according to art.4 of the Charter, executing public tasks should go together with the responsibility of local authorities.

In Poland the principle of decentralization of competence and responsibility is written down in the constitution and in each of the three acts which regulate local government on par- ticular tiers.

Association, protection and supervision of local government

According to the art.10 of the Charter, local government units should be entitled to co- operate and to form consortia with other local authorities in exercising their powers, in order

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to carry out tasks of common interests. They also should can co-operate with their counter- parts in other countries.

Each local community should also have the right of recourse to a judicial remedy, in order to secure free exercise of their powers and respect for principles of local self- government (art.11).

According to the art.8 of the Charter, supervision over municipal activities should be exercised on the basis of the criterion of conformity with the law. The criterion of propriety can be used only in case of tasks delegated from higher-level authorities.

Local government units in Poland can form associations, join them, as well as co- operate with local authorities in other countries.

The autonomy of gminas, poviats and voivodships is protected by law, what follows from the art.165 of the constitution and suitable regulations provided in local government acts.

According to art.85-87 of the act on the local self-government in gminas, the supervi- sion over their activity is exercised under the criterion of conformity with the law (the propri- ety criterion, mentioned above, is not used anymore), and supervising authorities may only interfere in cases specified by the law. Similar regulations concern the supervision over the poviats and the voivodships.

Financial principles

Much as the above discussion seems to prove that the local government in Poland is in accordance with the provisions of The European Charter of Local Self-Government, the case of art.9 about local government finance is, however, not so obvious.

According to the Charter any local community has right to adequate financial re- sources of its own, of which it may dispose freely. These financial resources should go in line with the responsibilities.

Poorer local communities should be covered with financial equalization procedures, designed to correct the effects of the unequal distribution of potential sources of revenue and of the financial burden they must face with. It is also recommended that grants to local au- thorities should not be earmarked.

Recommendations given above are written down in the art.167 of the Polish constitu- tion. It says, that local government units have a guaranteed share in public revenue adequately to their tasks. Local governments’ revenues are made of own revenues, as well as of general and specific grants from the state budget. The particular sources of income should be written in a suitable act.

Changes in the range of tasks and competencies of local authorities should be accom- panied by relevant changes in division of public revenues.

The rule cited above is put in practice in a great part. However, the art.9 p.3 of the Charter provides one more important recommendation (in the authors’ opinion – the key one for financial autonomy of local government), that at least a part of the financial resources of local authorities should derive from local taxes and fees, of which, within the limits of the relevant act, they should have the power to determine their rates. This statement determines the tax power of local government.

The analogous rule is in the Polish constitution (art.168). However in practice this freedom is limited only to gminas and only to some taxes and fees.

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69 Local government’s own revenues and tax power

The Charter provides that local authorities should be entitled “to have financial re- sources of their own, of which they may dispose freely” (art.9 p.1). At least a part of these resources should derive from local taxes and fees, of which they should have the power to determine the rate (art.9 p.3). It is a starting point to formulate a definition of the own reve- nues of local authorities.

In the Polish financial literature two extreme attempts of the own revenues can be found. One, narrow, means only revenues from those sources, where local authorities can de- cide about their introduction and defining the structure. However, more often met is another, where the own sources include all revenues collected from the area of the local government, given to it by law in full and without a time limit (Finanse …, 1995, p.138).

The revenue sources of each local government tier units are, at present, listed and (some of them) even described in The Act on Local Government Revenue (2003). Generally the local own revenue sources include the incomes from the surpluses of local government companies and other institutions, from the sale, renting and leasing of the local property, from dividends and other forms of capital revenues. And of course – from local taxes and fees as well as from shares in the State taxes. ²

The fact, that the own revenues come from sources located on the local government territory, enables local authority to exert some influence on their efficiency and therefore on their volume. On the other hand, however, as the tax potential depends on level of economic development, it causes disproportions between different local government units. These dis- proportions have to be compensated by general and specific grants from the State budget.

From the point of view of the local government’s autonomy it is also important that own revenue sources are known for a long period what makes easier to fix a hierarchy of tasks’ importance and execution. Thus the local government own revenue sources are more conducive to financial local government’s independence than the general or specific grants.

The concept of the own revenues is closely related with the tax power. Full tax power means that each local government has the power to levy local taxes and fees as well as to a piggy-backing. They also have right to decide on their own about resigning from collecting all or the part of a tax or spreading the tax arrears. Tax power gives also a right to decide about the tax structure by fixing rates, concessions, exemptions etc. Limited tax power allows to shape the structure of concrete taxes and fees within limits forced by the law (Owsiak, 1995, p.154).

Granting the tax power to local governments has a strong political and economic justi- fication. It increases their responsibility to the electorate for the local finance, increases the range of local budget and has a positive influence on the effectiveness of financial manage- ment. (Nykiel, 1993, p.53)

Revenues from local taxes and fees

In Poland local taxes and fees are in practice only on the basic level of the local gov- ernment, i.e. in gminas and in biggest cities having also a poviat status.

These local taxes include: the real estate tax, tax on means of transportation, tax on ag- riculture, forest tax, tax on legacies and donations, tax on civil-legal agreements and tax- charter (on personal commercial activity), as well as fees: market fee, local and spa fees, fee on dogs (till the end of 2007 – tax on dogs), treasury fee (or stamp duty, but at present – with-

2 Counting shares in the State taxes among the own revenues sources is controversial (e.g. Bury, 2005), but it exceeds beyond the scope of this paper.

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out stamps!) and many other ³ .

There are no local taxes in poviats and voivodships, so the constitutional right to fi- nancial autonomy cited above applies only to gminas.

The tax power in gminas is, however, also severely limited. That is because:

First, no one tax can be levied by local government. It is decided by the national law, which revenues are to or can be collected by gminas, namely: the real estate tax, tax on means of transportation, tax on agriculture, forest tax, so-called local fees (market fee, local and spa fees, fee on dogs) and which by the State tax offices: tax on legacies and donations, tax on civil-legal agreements and tax-charter.

Second, in each case, the legislator precisely and unconditionally determines dates of tax payment, what directly has an impact on the gminas budgets’ fluency.

Third, the tax base is also fixed by the national law. The only exception is related to the tax on agriculture, where a local government can decide, within a limited scope, about another classification of the arable land than it was specified in the law.

Fourth, the tax rates in taxes: on legacies and donations, on civil-legal agreements and tax-charter are fixed by the Minister of Finance and local councils have no possibility to change them. Local government organs also have no influence on the treasury fee rates. In case of the real estate tax, tax on means of transportation and four local fees it is the Minister of Finance who fixes their maximum rates. Each local government decides then about its own rates. Gminas have also a power to decrease the prices of rye which are the base to calculate the tax on agriculture; the same is in case of price of wood in the forest tax.

Fifth, about exemptions, postponements and concessions local governments can de- cide in relation to those taxes and fees which are collected by them. All other are subject to a decision of the State tax office (after a gmina’s consent).

Summing up, it can be said that from the three tiers of local government units: (1) only gminas; (2) have rather limited tax power; (3) in relation to several taxes and fees. All these rights result, however, in decreasing the possible maximum gmina’s revenues.

Conclusions

The European Charter of Local Self-Government is not an international agreement, but is a kind of declaration. Ratifying it means that the country voluntarily decides to follow its regulations.

A brief analysis of Polish law allows to admit that the Charter rules are respected. The only doubts relate to the local government finance. Although the articles in Polish constitution related to local government are similar to the relevant articles of the Charter, in practice the system of local government revenues is far from compatibility.

In poviats and voivodships there are no local taxes. Those in gmina can be shaped by local community in a limited scope, what may result only in decreasing the possible income.

The local government financial system in Poland should then be reconstructed to equip the gminas with bigger tax power and to grant at least a limited tax power to poviats and to voivodships.

Countries applying for the European Union membership, like Ukraine, also should take into account the regulations of The European Charter of Local Self-Government in build- ing their own system of local self-government. The neighbouring country’s experience could be as support in this task as well.

3 A rich description of local fees and charges collected by gminas may be found in (Bury, 2002).

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71 BIBLIOGRAPHY:

1. Bury A., (2005), Dochody własne i ich znaczenie dla dochodów i wydatków budżetów samorządowych, (The own revenues and their importance to revenue and expenditure of local self-governments’ budgets), Wydawnictwo Wyższej Szkoły Finansów i Informatyki im. prof. Janusza Chechlińskiego w Łodzi, Łódź.

2. Bury P., (2002), Finanse lokalne z elementami finansów państwa, (The local finance and the elements of the State finance), Wyższa Szkoła Umiejętności w Kielcach, Kielce.

3. Finanse publiczne, (Public finance), (1995), Wydawnictwo Naukowe PWN, Warszawa.

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8. Konstytucja Rzeczypospolitej Polskiej z dnia 2 kwietnia 1997 r. (The Constitution of Re- public of Poland), Dz.U. 1997, No.78, item 483.

9. Ustawa z dnia 8 marca 1990 r. o samorządzie terytorialnym (The Act on Local Self- Government), Dz.U. 1990, No.16, item 95.

10. Ustawa z dnia 8 marca 1990 r. o samorządzie gminnym (The Act on Local Self- Government of the Gmina Level), Dz.U. 2001, No.142, item 1591.

11. Ustawa z dnia 5 czerwca 1998 r. o samorządzie powiatowym (The Act on Local Self- Government of the Poviat Level), Dz.U. 1998, No.91, item 578.

12. Ustawa z dnia 5 czerwca 1998 r. o samorządzie województwa (The Act on Local Self- Government of the Voivodship Level), Dz.U. 1998, No.91, item 576.

13. Ustawa z dnia 29 listopada 2003 r. o dochodach jednostek samorządu terytorialnego (The Act on Local Self-Government Revenue), Dz.U. 2003, No.203, item 1966.

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