Abandonment in Action: The Abolition of the Surtax is an Opportunity for Skillful Mayors

In the coming weeks, cities and municipalities must decide what income tax rate they will apply from January 1, 2024, after the surtax on income tax has been abolished by the Law on Amendments to the Income Tax Law. Although all cities and municipalities that still collect the surtax this year will lose significant funds in their budgets, the draft proposals for decisions on the income tax rates, which are currently undergoing public consultation in many local government units, indicate that many of them will renounce the legal option to fully or partially compensate for the loss of surtax revenue by increasing the income tax rate.

According to all indications, mayors and municipal leaders have realized that the income tax rate is a tool they can effectively use to increase the number of working-age residents and their local competitiveness in attracting new investors, as well as to stimulate business activity in their area.

Tax Equal and Without Surtax

A few months ago, we were somewhat skeptical of the statement by the leader of the HDZ in Sisak-Moslavina County that ‘in the cities and municipalities where the HDZ is in power, income tax rates will not be raised after the abolition of the surtax, which will allow citizens to have higher salaries,’ but as things stand now, it seems that this will indeed be the case.

Thus, for example, the City of Novska will maintain the same income tax rates even though it will lose revenue from the city surtax of eight percent, which is being abolished.

– The City of Novska is renouncing revenue from the surtax in order to increase salaries for its citizens and provide a better standard of living. The income tax remains at the same rates, thus for the lowest salaries twenty percent, and for higher salaries thirty percent – stated the mayor of Novska, Marija Kušmiš.

Similar intentions have been announced by the leaders of Hrvatska Kostajnica and Petrinja.

– We will compensate for the loss of revenue previously obtained from the surtax in other ways. Among other things, we have many European funds at our disposal, and I am confident that we will complete the infrastructure we have started building with European funds – said the mayor of Petrinja, Magdalena Komes.

Among the cities that will completely renounce compensating for the revenue from the surtax by increasing the income tax rates is Dubrovnik, where the surtax is ten percent. Although the abolition of the surtax will result in a loss of revenue of about 2.4 million euros per year, they will not increase the income tax rates but will keep them at the existing levels of twenty and thirty percent. According to calculations made in the City Administration, citizens with a gross salary of 1500 euros will have an average of 265 euros more per year, and citizens with a gross salary of 2000 euros will have an average of 387 euros more, so families with two children will automatically see their annual income increase by 615 to 680 euros.

The Largest Cities Tax the Most

On the opposite side of the spectrum of tax rates is the City of Zagreb, where from the beginning of next year, the highest surtax in the country will be replaced by the highest allowable income tax rates, which will be 23.6 percent for lower incomes and 35.4 percent for higher incomes. Mayor Tomislav Tomašević justified this decision by stating that the City will incur a loss of 220 million euros due to the abolition of the surtax, which will be covered by the maximum income tax rates, which is necessary for all services it finances.

Zagreb residents have little consolation that this will not reduce their salaries, as the tax reform includes an increase in the amounts of the monthly basic personal deduction from the current 530.90 euros to 560 euros, personal deductions for dependent family members and children, as well as for disability. The annual tax base on which the lower tax rate is calculated will also increase from the current 47,780.28 euros to 50,400 euros.

The Zagreb model is also similar to the Rijeka model. According to announcements from Mayor Marko Filipović, Rijeka residents will pay income tax at rates of 22.4 percent and 33.6 percent from the beginning of next year. The abolition of the surtax will leave the Rijeka city treasury without about 12 million euros per year, and such high income tax rates will partially compensate for that shortfall.

– It is estimated that due to the increase in personal deductions and the increase in the tax base for calculating the lower income tax rate, income from income tax in the City of Rijeka would be lower by about 2.4 million euros, and that due to the abolition of the surtax, which is currently 13 percent, income from the surtax on income tax would be lower by 9.6 million euros, which altogether reduces tax revenues by about 12 million euros, or an 18 percent decrease in tax revenues compared to the planned tax revenues for this year – said Filipović.

The final effect of these changes will be as if Rijeka had reduced the current surtax rate from 13 percent to 12 percent, which was also the intention of Mayor Filipović for 2024 before that plan failed with the abolition of the surtax.

Osijek Has Other Sources

The mayor of Split, Ivica Puljak, presented a proposal in public consultation to raise the lower income tax rate in his city to 21.5 percent and the higher rate to 32.25 percent. This would affect the salaries of Split residents, as Puljak explained, as if the current surtax were reduced from 15 to 7.5 percent.

– Due to the tax changes, Split will incur a loss of about seven million euros. We did not opt for the maximum increase in the rate because we want to enable our citizens to have higher salaries, while at the same time we tried to ensure that our budget can withstand it. The biggest problem is that one million euros of our taxes will go to the county – explained Puljak.

Unlike the revenue from the surtax, which fully belongs to the city or municipality, income tax is shared between cities and municipalities and counties.

Osijek, which will collect about seven million euros from the surtax, which is 13 percent in that city, will be the only one among the four largest cities in the country not to raise income tax rates. Osijek’s mayor, Ivan Radić, announced this after the tax reform passed in the Parliament, stating that ‘specifically for the city of Osijek, we can say that Osijek residents will certainly be satisfied with this tax reform because their salaries will rise.’

– In the city area, we have investments worth over 150 million euros, record-high employment, and record-low unemployment. We have rationalized the system, manage well, utilize alternative sources of financing, both with the help of EU funds and with the help of the Government, ministries, and state companies, and we will continue to do so in the future – Radić stated at that time.

A Hot Winter Topic

Residents of Pula, who earn income solely from salaries, can be relatively satisfied with the proposed changes. The tax burden on their salaries from the beginning of 2024 will be slightly lower than this year; it will total 22 percent for lower salaries and 33 percent for higher ones. With the existing surtax of 12 percent, which brings about four million euros to Pula this year, the current tax burden on lower salaries is 22.4 percent, and on higher ones, it is 33.6 percent.

– After the Government made the decision to abolish the surtax, we got to work and succeeded. By raising taxes that will not significantly burden our citizens, but will encourage better development of culture, sports, and social programs, as well as the depopulation of the city and greater rental opportunities for students and young families, I believe that all councilors and political options will support this proposal, which is a prerequisite for the acceptance of the budget and the development of the city of Pula – explained the proposal for tax changes by the mayor of Pula, Filip Zoričić.

However, Pula residents who earn income (also) from renting apartments to tourists are extremely dissatisfied. At the same time as the changes in tax rates, Pula has decided to increase the flat tax per bed, which currently amounts to 39.82 euros, to the maximum allowed 199 euros. And Pula is not the only one wanting to maximize revenues from taxing tourist rentals – many other cities and municipalities along the Adriatic are preparing to do the same.

With a very high probability, we predict that the 199 euros per bed, when the news reaches all landlords, will be one of the hottest topics this winter.