The local tax burden in our country has been growing noticeably over the last ten years

For more than ten years, IME has been collecting data from 265 municipalities in the country on the levels of key local taxes and calculating a local tax burden index that illustrates the extent to which businesses in different municipalities are burdened by taxes. The index includes the following four taxes [1]:

Real estate tax for legal entities, which according to the Local Taxes and Fees Act (LSTA) can range from 0.1‰ to 4.5‰ of the tax valuation of the property.

Tax on the acquisition of property (transactional tax) for consideration, the rate of which may vary between 0.1% and 3% of the value of the property acquired, according to the MIPT.

Tax on vehicles and cars with a power of more than 74 kW up to 110 kW after taking into account the eco-component for Euro 1 and Euro 2. According to the MVT Act, the tax on vehicles in this power range can vary from BGN 1.1 to BGN 3.3 per kW and the Euro component rate from 1.1 to 1.4, respectively the permissible limits for this rate are BGN 1.21 and BGN 4.62 per kW. The reasons for considering the Euro 1 and Euro 2 components are that their coefficients are the highest, i.e. they reflect a scenario of the highest possible tax, and that the fleet in many municipalities outside the largest cities is relatively old. The 74 kW to 110 kW range was chosen as the majority of vehicles fall within it.

Patent tax for retail up to 100 sq. m. of net retail space per establishment. By law, the rates of this tax can vary from BGN 2 to BGN 20 per square meter.

To calculate the index, the values of the four rates in each municipality are normalized on a scale from 0 to 100, with 0 corresponding to the lowest rate allowed by law and 100 to the highest. The index is then calculated as the average of the four normalized rates. Thus, a hypothetical municipality with an index value of 100 has the highest possible tax burden, as allowed by the MSTA.

If we look at the local tax burden index map by municipality, we see that taxes are highest in municipalities along the southern Black Sea coast as well as in regional centers. High rates are part of the reason why Black Sea municipalities are the most financially independent in the country. At the same time, the tax burden is lowest in less populated and remote areas of the country where economic activity is weaker and higher taxation is either unnecessary or would cause strong resistance due to the low ability of taxpayers to pay. The municipalities with the highest local tax burden index are Sozopol (71.40), Primorsko (70.51), Sredets (65.82), Pomorie (64.74) and Varna (64.59). On the other side of the distribution are the municipalities of Kaloyanovo (24.03), Medkovets (24.33) and Mirkovo (25.72). On average for the country (weighted by the population of each municipality), the local tax burden index is equal to 53.02, with 45 municipalities having a higher value.

Over the past decade, the four taxes in the index have seen many more increases than decreases – 771 increases compared to 191 decreases since 2014. It should be noted that a large proportion of the increases are due to the introduction of the Euro 1 and Euro 2 environmental components in 2019, effectively raising the vehicle tax even if the base rate has not been changed. In 2019, 210 municipalities saw an increase in this tax, but only 24 of them saw an increase in the base rate. Even accounting for this detail, municipalities are apparently much more likely to increase than decrease taxes, which is understandable given that it increases their ability to cover local costs with their own revenues. Moreover, with the exception of a few cases in the case of the patent tax, each year the cases of tax increases exceed the cases of tax decreases. There is also an interesting trend in the incidence of tax increases: its incidence is lowest in local election years (2015, 2019, 2023)[2] and is highest in the years immediately after, after which it falls off smoothly as the next election approaches.

The frequent increases and infrequent decreases in local taxes across municipalities signal the gradual growth of the tax burden. This can be clearly seen in the index – while in 2024 its value was 53.02, in 2014 it was 47.49. (3) At the same time, in a period of high inflation municipalities do face a major challenge – while national taxes are generally levied on turnover, wages, profits, etc. and thus revenues automatically increase when price levels and incomes increase, most local taxes remain constant as the tax base is not affected by market prices. Apparently, many municipalities in the country find their own revenues insufficient and therefore resort to incremental increases in local taxes. This is one way for municipalities to reduce their financial dependence on the central budget, but it is clearly not enough, given that more than half of municipalities fail to cover even 50% of their local expenditure with their own revenues. Another way to achieve greater local financial independence is to channel part of the income tax directly to the municipalities – such as the IME’s “2% in your municipality” initiative. This would allow municipalities’ revenues to grow steadily over time, following income dynamics, and therefore keep pace with their spending.

1) Until last year, the index included the tax on taxi transport, but after a revision of the data this year, it was excluded due to its narrow scope (the taxi sector) and the fact that in many municipalities this type of service is not available. The revision also includes an adjustment of tax rates reported by municipalities, which however go beyond the permissible limits according to the MTAA.

2) 2019 is an exception for the vehicle tax precisely because of the introduction of the environmental component.

(3) This increase is not due to the introduction of the environmental component in the vehicle tax, as the value of the index is determined by reference to the minimum and maximum rates allowed by law, and these also change after 2019.