Government approves tax amendments

A meeting of the government today saw the planned amendments to income tax approved along with the rise in excise duties for the coming year.Approval was given to the changes in income tax set out in the government agreement, which will see the tax-free threshold increased to 3000 kroons per month and the rate of income tax fall to 18 percent by 2011. The government will also be seeking to implement an additional tax-free threshold from next year for couples who have their first child.

Raising the tax-free threshold will reduce state revenue next year by around 350 million kroons. The one percent reduction in the income tax rate established by the previous government will reduce tax earnings by 965 million kroons, meaning that a total of 1.32 billion kroons’ less income tax will form part of the state budget. The further increase in the tax-free threshold and reduction in the tax rate will reduce budgetary revenue in 2009 by 1.8 billion kroons, with the loss of an additional billion kroons from the tax-free threshold for couples having their first child.

“Just as we agreed, the tax-free threshold will be going up and the income tax rate will be going down,” said Ivari Padar, Minister of Finance. “At the same time, we feel it is necessary to raise some of our excise duty rates, for a number of reasons. One: taking into account people’s health; two: being environmentally friendly; and three: the transition to the euro, which is one of the goals we have set ourselves. It makes sense to take all of the steps now that we promised we would take when we joined the European Union. That way they won’t give us any problems with making the change to the euro at a time when fulfilling the inflation criterion is within our reach.”

According to the plan that has been approved by the government, excise on tobacco will rise next year to the EU minimum level, and the excise rate on alcohol will also go up. “Raising the excise duty rates on tobacco and alcohol is mainly to do with the unhealthy lifestyles that so many people lead in Estonia,” Minister Padar explained. “Increased duties will mean a price rise for alcohol and tobacco products, and this should help put the brakes on the growth in consumption.”

Excise rates on alcohol have only been raised by 5 percent over the last eight years, despite inflation having been 33.6% over the same period. Salaries have also risen significantly more than the price of alcohol. “Both the growth we are continuing to see in consumption and the differences between the general increase in prices and the raising of excise duty rates on alcohol underscore that it’s time they were put up,” said the minister.

The government’s plan will also see the excise rates on motor fuel raised next year and excise on electricity capped at 5 cents per kilowatt hour. Estonia took on the obligation of taxing electricity with excise as part of its European Union accession agreement. As establishing the excise will mean that producers no longer have to pay a carbon dioxide pollution fee to the government, consumers will not see the price of electricity increase.

The excise amendments will produce an additional 2.2 billion kroons for the state budget next year, and 1.6 billion kroons in 2009.

“The changes to income tax, which will leave people with more cash in hand, will have a notable effect on the state budget, but the rise in excise will bring some of that money back and give the government the chance to use it to improve people’s lives,” Minister Padar said. “But the working cycle of the government isn’t just one year, it’s four – and although next year will see more growth in state tax revenue than is usual, state revenue as a whole will decrease over those four years by more than four and a half billion kroons. What is most important is that the tax structure changes – that we are turning more towards taxing the kind of consumption that is wasteful and does no one any good instead of taxing the labour force.”

Click here for more information about the tax changes (doc)
Source: Ministry of Finance