The basis for creating local government structures is the belief that implementing designated public tasks closer to citizens’ needs will ensure that those tasks are performed more effectively. It should, of course, be remembered that the functioning of local government in a given country depends on the degree of decentralization of public authority, which then affects the delegation of specific tasks and their corresponding share in public revenues to individual units – covered by its organizational structure. Taking into account the last of the issues mentioned above, attention should be drawn to its importance in the context of the need to ensure the ability of local government units to perform the entrusted public tasks. The issue of financing and its adaptation to the scale of the tasks performed fundamentally affects financial independence, which in this case should also be understood as the ability to decide on income and expenses, including shaping their amount.
Polish legal order – status of the regulations
The provisions of the current Constitution of the Republic of Poland define quite broadly the basic principles of the functioning of local government in Poland, the structure of which is currently based on a three-level division including communes (2,478), points (314) and voivodeships (16). They result primarily from the principle of decentralization of public authority (art. 16 sec. 2), according to which local government participates in the exercise of public authority and performs a significant part of the public tasks specified in the acts on its own and under its own responsibility. The provisions of the Constitution of the Republic of Poland also include the so-called principle of presumption of competence of local government (art. 163) and divide public tasks performed by local government units into their own tasks, which are to serve the needs of the local government community, and tasks delegated to them by law (art. 166). It should be noted that the adopted division of public tasks is essential from the point of view of the sources and methods of financing their implementation. The provisions of the current Constitution of the Republic of Poland also provide guarantees of the participation of local government units in public revenues (art. 167 sec. 1), as well as – exercised under specific principles – the right to determine the amount of local taxes and fees (art. 168).
The principles of functioning of local government, performing public tasks, and conducting financial management have been regulated in detail at the level of acts. The provisions of the Constitution of the Republic of Poland explicitly require the regulation of the rank of an act to determine the sources of income of local government units (art. 167 sec. 3). In this case, systemic laws are of crucial importance, Act 27 August 2009 on public finances and the Act of 13 November 2003 on the income of local government units.
Fundamental aspects of financial independence
Income independence
The financial independence of local government units should be understood as the right to conduct financial management independently and is considered on two basic levels – the possibility of collecting public income (revenue authority) and spending it for purposes related to the implementation of assigned tasks and on the terms specified by law (expenditure authority). An important issue in this case will also be determining the appropriate proportions between the amount of public revenues at the disposal of local government units and their ability to carry out their tasks. Therefore, since in the process of decentralization, these units are entrusted with a significant part of public tasks, the performance of which depends on the level of their provision with specific assets and public funds, in the case of each level of local government, it is necessary to create a framework for their functioning that takes into account the scope of the entrusted tasks, and also provide sufficient financing.
The issue mentioned above is regulated by art. 167 sec. 1 of the Constitution of the Republic of Poland, according to which local government units are provided with a share in public revenues in accordance with their tasks (principle of adequacy). Article 167 sec. 4 of the Constitution of the Republic of Poland is a consequence of the principle of adequacy and includes a mechanism that additionally strengthens its application in practice. This mechanism is based on the assumption that changes in the scope of tasks and competencies of local government units should be matched by appropriate changes in the distribution of public revenues. Provisions in this regard – in relation to all levels of local government – also result from the provisions of constitutional laws (art. seven sec. 3 of the Act on Municipal Self-Government, art. 56 sec. 3 of the Act on Poviat Self-Government and Art. 67 of the Act on Voivodeship Self-Government). Therefore, any changes that would result in an extension of the scope of tasks and competencies of local government units should result in appropriate changes in the distribution of public revenues. In this case, increasing the financial resources of individual units may take various forms.
It should be noted that the provisions of the Constitution of the Republic of Poland do not specify criteria by which it would be possible to assess whether the income of individual local government units at a specific level is adequate to the tasks assigned to them. This issue was left to the legislator's discretion, giving it far-reaching freedom in this respect.
Taxation authority
The degree of income independence of local government units depends mainly on tax authority, which is most often understood in a broader sense and refers not only to taxes themselves but also to competencies in shaping the amount of local fees. The tax authority of the local government is based on the provisions of the Constitution of the Republic of Poland. Pursuant to art. 168, local government units have the right to determine the amount of local taxes and fees. However, this right is not unlimited because, in accordance with the above-mentioned provision, it is exercised within the limits specified by the Act.
The structure of income of local government units
The primary categories of income of local government units are also defined by the provisions of the Constitution of the Republic of Poland (art. 167 sec. 2), which lists in this respect: own income, general subsidy, and targeted subsidies from the state budget. In the case of determining the sources of income of local government units, the provisions of the Constitution of the Republic of Poland (art. 167 sec. 3) require regulation of the rank of an act. This issue was regulated in detail by the Act of 13 November 2003 on the income of local government units, which, pursuant to the provisions of the Constitution of the Republic of Poland, lists own income, general subsidy, and targeted subsidies from the state budget in the group of three basic categories of income (art. 3 sec. 1). However, the category of own income also includes shares in revenues from personal income tax and corporate income tax (art. 3 sec. 2, art. 4 sec. 2 and 3, art. 5 sec. 2 and 3, art. 6 sec. 2 and 3). Pursuant to art. 3 sec. 3 of the Act, the revenues of local government units may also include funds from foreign sources that are not subject to return, funds from the EU budget, and other funds specified in separate regulations.
However, in the context of the above-mentioned provisions, an interpretation problem arises, which in the group of targeted subsidies only provides for subsidies from the state budget. The provisions of the Act on the income of local government units – introducing an open catalog of own income – do not solve this problem because not all categories of local government income can be considered as own income, and, moreover, subsidies used by local government units do not always fall within the concept of a targeted subsidy from the state budget. Taking into account the above doubts, it would be advisable to clarify the content of art. 167 sec. 2 of the Constitution of the Republic of Poland, a reference to the act in force in this respect cannot be considered sufficient. The provision of art. 167 sec. 3 of the Constitution of the Republic of Poland requires that the sources of income of local government units be specified in the act, which does not mean, however, that its content may be inconsistent with art—167 sec. 2 of the Constitution of the Republic of Poland.
Property authority
In terms of the financial independence of local government, attention should also be paid to the issue of equipping it with specific property. The separation of municipal property and legal mechanisms for its protection is primarily a consequence of the establishment of local government units as entities of public law. Property is also one of the sources of income for municipalities, counties, and voivodeships. Attention should be paid to the content of art. 165 sec. 1 of the Constitution of the Republic of Poland refers to the issue of legal personality of local government units, and granting them legal personality as well as property rights and other property rights guarantees their implementation of public tasks. The granted legal personality and assigned property rights also allow for the separation of local government units in relation to other public law entities and are an important element in recognizing their independence.
Expenditure independence
Financial management by local government units also takes place while maintaining the freedom to decide on expenses (expenditure authority). This concerns the competencies related to determining the structure of expenditures and the principles of their implementation in the budget implementation process each year in the budget resolution. The expenses of individual local government units are often referred to as the costs of public tasks performed by them, which are based primarily on the provisions of systemic laws but also on the requirements of laws that regulate various areas of social relations in detail. Expenditures of communes, counties, and voivodeships are incurred for the purposes and in the amount specified annually in the budget resolution.
The open catalog of expenses of local government units is specified in art. 216 sec. 2 of the applicable Public Finance Act, which includes in this respect expenses related to the performance of own tasks, tasks within the scope of government administration and other tasks assigned by statute, tasks taken over for implementation by way of a contract or agreement and those carried out jointly with other local government units. In this respect, the cited provision also lists expenditure on material or financial assistance for other local government units, as well as the implementation of programs financed with funds from the EU budget and non-repayable funds from assistance granted by EFTA Member States and other funds from foreign sources not subject to reimbursement.
The level of financial independence of local government units in Poland
The financial autonomy of local government is a very complex issue because it concerns many aspects of the functioning of organizational units included in its structure. Determining its boundaries depends, in each case, on many factors influenced by the political, social, and economic conditions of a specific country. Although the financial independence of local government in Poland is guaranteed by the provisions of the current Constitution, the interpretation of its various aspects often emphasizes (also in the jurisprudence of the Constitutional Tribunal) that its limits will always be determined by the financial capabilities of the state (in terms of income and in relation to the principle of adequacy), on the other hand, these restrictions are necessary due to the stabilizing function of the state.
It should also be noted that in the case of communes, points, and voivodeships – in addition to all aspects of their financial independence discussed above – the provisions of the applicable Finance Act and the Act on the Revenues of Local Government Units, within their specific substantive scope, regulate in detail the entire budget planning process, adopting the budget, specifying its properties, principles of budget execution and control, as well as the process of collecting and spending revenues. Specific principles of long-term planning also apply to these units, and the basic institutions and solutions typical of the state budget apply here. In this case, we are talking about the broadly understood financial management of local government units, its assumptions, and implementation principles, but the fact that these regulations were adopted and in force in a detailed scope, as well as their regular supplementation and changes under individual public finance acts, starting from 1998, also is of key importance from the point of view of the discussed issue.
It is correct to say that the financial independence of local government largely concerns revenue aspects and that own revenues should be of primary importance in financing expenses, but in Poland, only municipalities can directly decide on them to a limited extent (in terms of, e.g. rates of selected taxes or fees within statutorily defined limits and tax reliefs and exemptions), while in the case of powiats and voivodeships this impact is negligible due primarily to the adopted tax structure in the form of shares in PIT and CIT tax revenues.
Considering the data of the Central Statistical Office, in 2021, the revenues of local government units amounted to PLN 158,619.6 million (increased by 8.4% compared to the previous year). Shares in personal income tax revenues amounted to PLN 62,081.4 million (increased by 12.7%). Meanwhile, income from corporate income tax amounted to PLN 14,300.0 million (increased by 26.3%). The share of personal income tax in the structure of own income was 39.1%, while in the case of corporate income tax, this share increased to 9.0%. Property tax revenues amounted to PLN 26,117.0 million (increased by 7.9%).
In the structure of income of local government units in 2021, the largest category was own income (47.6% of total income). The share of subsidies in total income was 27.7%. In the case of subsidies, this share in 2021 was 24.7%. According to data provided by the Central Statistical Office, points were the most dependent on revenues from the state budget – transferred in the form of grants and subsidies. In the analyzed period, the share of these incomes in total income amounted to 61.9% in points, 57.7% in communes, 43.3% in cities with power rights, and 44.4% in voivodeships (Financial economy of local government units 2021, Warsaw 2022, pp. 23 et seq.).
It should also be noted that local government units in Poland cannot introduce new taxes, except in the case of the self-taxation of residents, which is provided for in the case of communes and requires a commune referendum. Therefore, when talking about local tax authority – in Poland, we generally refer only to communes, which make decisions regarding tax revenues only in relation to certain taxes and fees and within limits specified by law (see Art. 84 and Art. 168 of the Constitution of the Republic of Poland). A specific dysfunction in this respect is primarily the fact that a significant part of the revenues contributing to the budgets of local government units, including taxes, is left to the state.
An issue often raised in the discussed case is also the taxation of real estate in Poland based on area taxation and maximum rates specified by law (with the exception of buildings or their parts related to running a business, which is related to their value). One of several important arguments for the introduction of cadastral tax in Poland is the increase in communes’ income. The lack of decisive action in this area is most often justified by the consequences of the need to significantly change regulations, launching many complex processes related to, for example, updating the value of real estate and, of course, more significant burdens on some taxes.
Another current problem is the fiscal equalization system in force in Poland, which aims to reduce disproportions in the wealth of individual local government units. While the validity of the principles of solidarity underlying this solution cannot be questioned, attention should be paid to its interpretation in the context of the constitutional principle of subsidiarity. Most often, the need to change the payment system itself, as well as the criteria and indicators that are the basis for their calculation, is raised in this case.
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