The Political Budget Cycle in Earmarked Taxes for Local Public Services: A Comparison of Poland and Bulgaria

Abstract

The concept of the political cycle was formulated in relation to the decision making of governments and parliaments at the national level, but it has also been used as a framework for studying local financial decision making. Most of the earlier empirical studies focused on public expenditures, but later studies also investigated local tax policies. This article argues that, in Central and Eastern Europe (where the concept of political cycle has been applied very early so far), the meaning of typical local taxes is relatively limited, and levies financing local services may be a more likely policy area to demonstrate the existence of the political budget cycle. This case study is related to tariffs for water provision in Poland and solid waste collection in Bulgaria. In spite of official terminology, the legal definition and practice of both duties do not meet all criteria of the rigid definition of user charges for services. Due to their actual nature, the term “earmarked taxes” is used in the title, while the terms tariffs and earmarked taxes are used interchangeably in the text. The existence of the political cycle is tested through panel logistic and linear regression models. According to the legal regulations in both countries, tariffs for both services should be calculated in a technocratic way based on actual costs, however the article demonstrates that the impact of the electoral cycle on actual decisions on the level of levies still exists.

Keywords:

• political business/budget cycle
• local government
• public service tariffs regression analysis
• comparative analysis
• Poland
• Bulgaria

Acknowledgements

The article is based on results of the “Fees for Local Public Services – Financial and Political Importance” research project.

Notes

1. This choice of terminology is in line with the vast majority of previous studies, testing the relationship between fiscal variables and the electoral schedule (see, for example, Medina and Lema 2004, Brender and Drazen 2005, Guo 2009; Benito et al. 2012, 2017; Eryilmaz and Mercan 2015; Aaskoven 2018); however, several authors still use the original term “political business cycle”, even if they are studying changes in budget policies (for example, Baleiras and Costa 2004; Veiga and Veiga 2007; Sedmihradská et al. 2011; Plaček et al. 2016).

2. Mouritzen (1989) has analysed the political budget cycle for various areas of the revenue (total revenues, local taxes, fees for local services) and the expenditure (total expenditure, current and investment spending) sides of the budget. Specifically, he has analysed the relationships between these elements.

3. Property tax is the most important local tax in Poland, but over 85% of its yield is collected from properties used for commercial purposes.

4. Our claim is supported by the recent survey of over 1,000 Polish local government treasurers who indicated tariffs for local public services as the hottest issue among all topics debated by local councils (Kopańska 2018).

5. The basic element of the tariff (which is taken into account by our study) is set per cubic metre. In some municipalities the tariff is different for various users (for example, higher for businesses), but having in mind the purpose of the study, we concentrate entirely on tariffs for households.

6. This includes the maintenance of containers and bins for waste collection, the cost of collection and transport, monitoring of depots, and so forth. The amount payable depends on the volume of waste, and for cases where it cannot be measured, it is determined by the number of users, or proportionally on a base set by the municipal council. The system is going to change significantly in 2022 (to connect the amount of fee more closely to the volume of generated household waste), but the impact of that change goes beyond the scope of our empirical study.

7. One of arguments provided by King (1984) against subsidizing tariffs for local services is that it would allow the rates of local taxes to be lowered. This argument goes in line with the discussions of Wolman and Davis (1980) as well as Dafflon (2015), which we referred to in the previous section.

8. Actually, this feature has been criticized in Bulgaria for years, and it is going to be changed by 1 January 2022 to a system which is closer to classic tariff.

9. The term “subsidy” is used in this context by King (1984), for example.

Additional information

Funding

This work was supported by the Narodowe Centrum Nauki (National Science Centre), Poland [UMO-2015/19/B/HS4/02898];

Notes on contributors

Pawel Swianiewicz

Pawel Swianiewicz is a professor of economics at the University of Warsaw, and Head of the Department of Local Development and Policy at the Faculty of Geography and Regional Studies. From 2005 to 2010, he was a President of the Board of the European Urban Research Association. Currently, he is a member of the Steering Committee of the Standing Group on Local Government and Politics of the ECPR.

Anna Kurniewicz is a PhD student in the Department of Local Development and Policy, Faculty of Geography and Regional Studies, University of Warsaw. Her research interests focus on local government politics and development of cities.

Desislava Kalcheva has a PhD in Finance from the University of National and World Economy, Sofia. Her research interests focus on public finance, local investments and regional development.