As we know, the Tsalenjikha municipality is the only one where the candidate from the opposition, the United National Movement’s Giorgi Kharchilava, won in the run-off of the local self-government election. Given this fact, Tsalenjikha came under a particular public spotlight.
The leader of the Lelo political party, Mamuka Khazaradze, announced he was moving to Tsalenjikha and purchasing a house. In addition, Mr Khazaradze urged businesses to change their location, move them to Tsalenjikha and pay a profit tax in Tsalenjikha as well.
The idea itself is certainly good. However, below we analyse the extent to which the Law on the Budget of Self-Governing Units and the Code of Self-Governance allow this to happen.
The Law of Georgia on the Budget of Local Self-Governing Units states that the receipts of a local self-governing unit’s budget is the total sum of the funds collected in the reporting period including revenues (taxes, grants, other incomes), non-financial assets (funds received from transactions performed with non-financial assets), financial assets (funds received from transactions performed with financial assets except for the use of the balance) and obligations (funds received after undertaking obligations).
The budget receipts of a local self-governing unit’s budget consist of its own receipts and transferred funds. Local taxes and duties, equalisation payments and other receipts intended for a self-governing unit as envisioned by Georgian legislation constitute its own receipts. However, special and targeted transfers and other receipts as envisioned by Georgian legislation constitute transferred funds.
Local self-government units are allowed to spend their own receipts at their own discretion (Chapter II, Article 9).
The major source of budget revenues for the local self-government unit in Georgia was an equalisation payment received from the state budget. In addition to the transfer, other sources of a municipality’s revenues are local taxes and duties.
Currently, there are six taxes in Georgia. Of these taxes, only property tax is a local one whilst the rest comprising profit tax, income tax, VAT, excise tax and import tax are national taxes.
Therefore, as mentioned earlier, the only local tax is a property tax which is 100% funnelled to a municipality budget. However, some portion of income tax; in particular, taxes from revenues from activities of entrepreneur physical persons, has also remained in the local self-government’s budget since 2018. Nevertheless, support in the form of the equalisation payment still remains as a major source of municipality income. At the same time, leaving some portion of income tax in the local self-governing unit’s budget has not led to a growth of total budget revenues since the amount of the equalisation payment for each and every municipality was determined in accordance with their own revenues and the volume of the equalisation transfer was shrinking proportionally to the growth of a municipality’s own income.
This picture started to change in 2019 when the equalisation payment was abolished and self-governing units share 19% of VAT-generated incomes which are distributed in line with legally defined criteria. These criteria include the number of inhabitants registered in a municipality, the number of children under the age of six years in a municipality, the number of minors aged six to 18 years in a municipality, the area of the municipality and the number of people who have the status of a permanent resident in mountainous settlements.
If a municipality’s revenues will increase from local taxes, duties and other incomes, the revenue payable to the municipality from VAT-generated income will not decrease. However, in the case of the equalisation payment, this would have resulted in cutting the financial support from the central budget. This implies that if a self-governing unit’s revenues increase, it leads to the growth of the self-governing unit’s budget as well. However, as mentioned earlier, only property tax remains in the local budget whilst other types of taxes, such as profit tax and income tax, are accumulated in the central budget.
Given these circumstances, if business owners register their business in Tsalenjikha pursuant to Mamuka Khazaradze’s urging, this will not lead to a growth of the local budget since profit tax is not paid to the local budget. In addition, job growth and the payment of income taxes from employed individuals will also unfortunately not be in the favour of the local budget. The budget will only grow by property tax and so business owners would have to move their assets to Tsalenjikha. Of additional note is that property tax is a local tax and each municipality sets the property tax rate at its own discretion. However, even in this part, the upper limit of property tax is capped at 1% by the Law of Georgia on the Liberty Act. Therefore, the property tax rate cannot be increased above this threshold. A municipal council can set its property tax rate within a 1% range.
We discussed the legal ways to increase a local budget. However, FactCheck affirms a strong solidarity to any activity in Tsalenjikha with even one additional job being a positive gain for the locals living in poverty. Furthermore, 33.3% of Tsalenjikha residents (7,766 people – 2,098 families) receive subsistence assistance and 12,235 people are registered in a database for socially vulnerable people as of October 2021.
This year, Tsalenjikha’s budget is GEL 16,346,300 of which GEL 8,904,800 comprise its own revenues whilst the remainder is in the form of transfers and grants allocated from the state budget.
The Prime Minister of Georgia, speaking at a government session, congratulated elected mayors, including the mayor of Tsalenjikha and stated: “I would like to wish every success to the mayor of Tsalenjikha – he is the only candidate from the opposition who deservedly won the elections and I would like to say to him that the entire central government will be ready to have cooperation with him in a constructive manner.” Prior to the run-offs of the self-government elections, the Prime Minister stated that the ruling party was going to hinder the opposition mayors in their activities.
This article shows that both the opposition and the government have certain plans vis-à-vis Tsalenjikha. For the opposition, Tsalenjikha will be an example for their successful governance in the next four years. The government’s future position remains to be seen. However, this concentration of attention on Tsalenjikha will presumably serve better for the municipality.