Waste Tax

This week, the parliament approved some amendments, which will affect the tax assessment on real estate property, and therefore will increase the property tax, the waste fee and the real estate transfer tax in 2007.

Since the majority of the Bulgarian population will be affected by this change, it would be useful to assess for whom the tax increase will be beneficial and whether there is any real meaning behind it.

The increase of the property tax and waste fee will not be substantial considering the market real estate prices in Bulgaria. These two taxes have been falling behind the rapid development of prices in Bulgaria through the recent years, thus they do not pose significant burden for the owners of property. The sole concern from the approved legal change stays with the waste fee. In fact, it can easily be called tax not just fee, since the revenue collected from it is allocated for certain reasons – garbage collection, trucking and disposal. Exactly because waste tax is used for specific services, these services can easily be “privatized” and the tax abolished.

Currently there are a few basic problems from the existence of waste tax:

1. The municipality is spending the collected money without any control by the civil society.

2. The municipality makes contracts for the collection and disposal of garbage with private companies. Nevertheless, there are cases of non-beneficial for the citizens contracts where the concessionaires are earning profits, the quality of the services is low, and the financial resources are spent irrationally.

3. There is no motivation for the concessionaires to improve the service, since they have monopolist status. Citizens do not have any other option even if they are not satisfied with the service.

4. The competition in providing these services is utterly reduced (the companies in the big cities are offered some options to choose from)

For the situation to be changed the municipality’s responsibility for the collection and disposal of garbage should be re-directed to the private sector on the principle of individual contracting. How can this be achieved?

To start with, the waste tax should be abolished. The waste collection and disposal should be based on contract base and the payment for these services arranged between the company exercising them and the owners of the property. When there are a few companies offering the same services in a particular area, the competition among them will flourish and the final product and price will be better for the citizens.

Private contract between the citizens and the company would allow greater control on the quality of the service and liability before the penalty when the service is not exercised properly. The service fee can be calculated on the volume of the collected garbage or can be a permanent duty plus additional percentage from the volume of the collected garbage. This would be determined by specific company and the citizens/customers.

Moreover, the price of the service will be more flexible, i.e. if there are unoccupied apartments within the building, they will not pay the same price for waste collection and disposal as the occupied ones. Another advantage would be elastic supply of services according to time of collection, and separation of the waste. Besides, the price of the services can depend on the distance of the dumping-hall from the particular region.

Last but not least, it is important to point out that the expenses on levying the waste tax and the administrative expenses of the municipal administration will be significantly decreased after its abolition.

Another issue, which can be considerably relieved, is the one connected to separate collection of waste. This has been in place in Bulgaria since 2005 but the effect is still not substantial. If services on waste collection are completely privatized, the companies can even offer lower prices for partitioned waste, since it can be recycled. In numerous countries waste that can be recycled if collected in special dustbins, which are trucked, free of charge. This can effectively reduce the waste collection expenses for citizens and subsequently increase the share of waste, which can be recycled, and therefore decrease the amount of waste at a certain dumping-ground, respectively increase its sustainability.

The waste tax is used by the municipality not only for the collection and disposal of garbage but for keeping the city clean. If the waste tax is abolished, the municipality can use other revenue for financing this activity:

1. Revenue from privatization of the municipal companies and sales revenue from municipal property;

2. Revenue from concessions

3. Increased revenue from the approved increase of the real estate tax from 2007

4. Saved revenue from the increased effectiveness of the administration.

For 2006, the revenue allocated for collection of waste in Sofia is 27 820 000 leva out of 85 326 000 leva, or approximately 33%. These expenditures can easily be decreased if public bidding for the waste service is announced. The public bidding will eventually decrease the price of the service.

But again, the waste collection expenditures should be covered by some revenue and we suggest it to be from the property taxes that accounts for 87 350 000 leva in Sofia Municipality in 2006. The breakdown is the following:

– property tax – 24 mln. leva

– inheritance tax – 150 thousands leva

– vehicles tax – 18 mln. leva

– real estate transfer tax – 44.2 mln. leva

– other taxes -1 mln. Leva

From the data above, it is evident that waste tax can be completely abolished, and waste collection and disposal services exercised by private companies, which will be responsible in front of the citizens, not the municipal administration. Thus, eventually the quality of the services will increase and the price will decrease.

In order to achieve these, two crucial things should exist:

1. Fiscal decentralization of the municipalities – to allow them decide on their own fiscal policy and use the collected revenue by their own judgment

2. Provision of transparent, open and democratic procedures for public procurement procedures.