Tax hikes in the pipeline

Photo: Marko Saarm

The general outline of the new coalition's tax policy had more or less taken shape behind closed doors by yesterday evening. It is very probable promises for the coming years will be covered with the help of new consumption taxes, and social and income tax hikes.

Even though the finishing touches will be applied this morning, information available to Postimees suggests it was clear by yesterday evening that the most significant financial impact will be delivered in the form of suspension or reversal of staggered tax cuts.

For example, the plan includes hiking physical and legal persons' income tax rate from the current 20 percent to at least 21 percent, giving the budget an additional €92 million.

Changes are also in store for social tax the 0.5 percent cut of which over coming years will be canceled and the rate taken back to 33 percent or more. The latter move would bring an additional €90 million.

Changes will not happen overnight

Early hikes would, however, hit the excise duty on beer. While concrete figures have not been agreed on, the incoming coalition is counting on at least €10 million in revenue.

Among more radical plans is abolishing income tax exemptions on home loan interest and training expenses, to which Estonians have become used to, that would save the state €10 million annually. Limiting the latter was also on the agenda of the outgoing coalition.

Tax hikes are needed for one of the new coalition's main promises – hiking the income of people earning modest salary. The plan would see minimum income exempt from tax hiked from the 180 euros currently planned for 2017 to 500 euros a month. This would herald additional expenses of €560 million a year for the state. Taxes cannot be hiked overnight, however, as six months advance notice is required by law.

Economic adviser to the president Heido Vitsur said that hiking minimum income exempt from tax is a good decision. “We tax low-paid workers relatively heavily because taxation begins at very low income levels, while we have relatively low taxes for people earning big salaries, compared to other European countries. Estonia will become more European,” Vitsur said.

Vitsur recalled that abolition of tax returns was discussed after the economic boom in 2008. “Finally there are plans to get it done. Tax exemptions on interest only fueled the real estate bubble further,” he said.

It would be very difficult to abolish interest returns on loans already issued, however, as it would betray people's legitimate expectations.

Economic expert, Minister of Education and Research Maris Lauri (Reform Party) and MP Aivar Sõerd (Reform Party) remained very critical of plans to hike the tax burden of companies as they believe it will deliver a blow to already fragile economic growth.

“We should be lowering labor taxes. Looking at what experts have said in Estonia and abroad, everyone is saying our labor taxes are too high. It would be a mistake to start hiking them again,” Lauri said.

The outgoing coalition's plan forecast social tax receipt at €2.69 billion after the 0.5 percent tax rate cut scheduled to take €41.5 million from revenue.

Sõerd said that hiking labor taxes would send the new government swimming upstream compared to neighboring countries, hurting Estonia's competitiveness.

“These two steps are working against livening up the economy. It will slow down growth. It is moving in the exact opposite direction of what Erkki Raasuke's working group suggested,” he said. “It is a message to investors: do not invest in Estonia as business environment is subject to change for the worse overnight.”

Sweets tax probable

In addition to major tax hikes, the new coalition is looking at other ways of boosting income. As of yesterday, one of the more probable options is laying down a so-called sweets tax that could bolster the state budget with an estimated €5 million.

The current government considered laying down a sweets tax in 2013 and 2015, but decided against it as it found the consumer would not be ready for such a change, and because the new tax would add to administrative burden.

Head of the Estonian Food Association Sirje Potisepp said that a sweets tax would lead Estonia into a blunder a lot of other countries are trying to get out of today. For example, Denmark has abolished its sugar tax, and Finland is in the process of doing the same.

Experience from the two countries shows a sweets tax had no positive effect on health indicators whatsoever, while it did deliver a financial blow to people with modest income. The head of the association also said that the new coalition's plans will hurt the ordinary consumer whom the government is giving money with one hand and taking it back with the other.

“That is why I am especially baffled to hear the new coalition that is quite vocal on how they plan to protect people earning modest salary talk about such new taxes,” she said.

Potisepp was equally critical of the plan to abruptly hike the excise duty on beer. We already know Estonia will miss out on €15-20 million in excise duty revenue because of alcohol tourism to Latvia this year; these losses will only grow in the future.

The Center Party's initiative of a so-called banking fee that could bring an additional €10 million annually had also survived negotiations by yesterday evening. Several options remain on the table, including taxing banks' share capital or profits.

“Estonia is the home of Nordic banks; they would probably be less than surprised to have to comply with the same kind of tax regulations in Estonia than they do in Sweden,” Center Party faction chairman Kadri Simson told Vikerraadio last week. It is, however, possible this would result in more expensive banking services for the Estonian consumer.

“This seems like a great idea, because, as we know, banks are bad. However, banks might stop paying income tax then,” Education Minister Maris Lauri was critical of the idea.

How tax changes will be realized exactly will become clear today when the coalition partners present them to the Free Party.