Is the Garbage Tax Increase Justified?

Recently we understood that the Municipality of Sofia discusses a possible (and very probable) increase of the garbage tax (or garbage fee, as it is called). This increase will happen because of the proposed growth of the taxable values of the real estate which growth will not be fully compensated by decrease of the garbage tax rate. The justification for this policy is the need of more money for cleaning the streets, collection of garbage and its transportation and storage (or burning). Critics of this policy point out that Municipality of Sofia pays more money for cleaning and collecting garbage that other comparable cities and still the city is not clean enough and there is a permanent shortage of money for these activities.

Collection of garbage

The collection of the garbage in Sofia and the other municipalities is financed by the garbage tax. Essentially, the garbage tax is a tax on the values of the real estate. Therefore, there is no connection between the garbage that is disposed by the owner of the property and the tax paid by him. The collection of the garbage is done by companies that have concession contract with the municipality of Sofia. Each company has a monopoly for collection of the garbage in its region.

We can see several problems with this arrangement of the garbage collection:

•  No connection between the disposed garbage and the garbage tax paid

•  The garbage tax is set by administrative decision

•  The garbage collecting companies are selected by administrative decision

•  No competition and existence of a real monopoly

•  No incentives for efficiency – because of the lack of competition

What can be done to solve these problems?

Instead of continuing the current system that leads to a constant increase of expenditures, some changes in the system can be designed. One possible reform is decentralization of the garbage collection, which is used in some European countries. These are the general principles of the decentralized system:

•  People living in a block of flats (or commercial company owning real estate) choose the company that will collect their garbage. They are free to choose any company they want.

•  The price for garbage collection is negotiated between the garbage collection company and the people, living in the block of flats (or the company owning the building).

•  The timing of the garbage collection is also negotiated between the two sides of the contract.

•  The garbage tax is revoked.

As a result the garbage collection fee will be negotiated and paid on market terms and it will depend entirely on the quantity of the garbage disposed . The garbage collection companies will be many and they will compete which will drive prices down to the market levels. Garbage tax will disappear.

Storage and burning of the garbage

Another problem that requires a lot of expenditures is connected with the storage and burning of the garbage. A factory for burning the garbage must be build and this requires a lot of money. One possible solution is to increase the property taxes (including garbage tax) in Sofia. The other variant is much better – the Municipality of Sofia can sell some of its assets and increase the efficiency of its expenditures; then it can use the proceeds for building the required factory.

There are several possibilities for financing the factory:

• Privatization of “Municipal Bank” and “Municipal Insurance Company”
• Optimization of the administration
• Privatization of “Sofia Real Estate Company” (Sofiiski Imoti) as well as buildings, land, offices that are property of the municipality
• Elimination of the useless Municipal Guarantee Fund for Small and Medium Enterprises
• Privatization of central heating company, city transport, protection company “Egida”, hospitals and medical institutions
• Introduction of competitive public procurement for expenditures and ensuring full transparency of the municipal spending

The usage of all these possibilities for financing will help avoiding the increase of taxes for financing the garbage-burning factory.

Conclusion

When public spending is discussed there is a constant need for searching for more efficient decisions. In the case of Municipality of Sofia such solutions are the decentralization of the garbage collection and financing the garbage-burning factory by selling other municipal assets. If these two things are done, the result will be abolition of the garbage tax and ecological (and cheap) destruction of the garbage.