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Revue Française des Finances Publiques

Post-2020 multi-year financial framework

RFFP n° 141 – 2018

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 Local tax reform :

the eternal return


The matter of reforming local taxation and its counterpart, tax autonomy, is nothing new. It appeared as soon as the State began to transfer taxes to local authorities which dates back to the revolutionary period (property tax, personal property tax, licensing tax) by allocating them their own taxation and laying the first stone in the foundation of local tax autonomy.


However, it was not until the 1970s that this taxation was actually modernized by creating the housing tax and property taxes on buildings and unbuilt land in 1973 and the business tax in 1975. But it was only later, when the act of 10 January 1980 instituted the right to vote on tax rates for these taxes that taxation became a major source of autonomous financing and that local tax power reached its zenith. The movement gradually ended during the second half of the 1980s when the proliferation of tax breaks and exemptions would progressively transform local taxes into allocations or disguised as compensation or integration into public funds (DGF). This is when local tax autonomy levelled off and that a new way of thinking started to take hold which has been confirmed recently with the elimination of the business tax in the 2010 initial finance act or more recently with the exemption of 80% of households from the housing tax in the 2018 initial finance act. In view of these measures that follow a change that has taken root over the past four decades, one can wonder if local tax autonomy has become anachronistic. Looking at successive tax reforms on local taxation reveals that they have shifted towards a top-down regulation approach, a direction that could bring with it the risk of adverse effects.


In time this change is likely to make local and regional authorities entirely reliant on the strategies and above all the financial constraints of their primary funder – the State. Bear in mind that the weakening tax power of local authorities can also impact the close relationship that they have with their citizens. Furthermore, in the absence of autonomous local taxes, the quality of financial dealings between local authorities and the State may also suffer through a relationship solely built on State handouts likely to deteriorate under the pressure of budgetary requirements. Finally, if we consider that the origin and foundation of all political power is largely determined by who holds tax power and not who simply manages financial resources procured and granted by others, the vital question remains on the administrative freedom of local and regional authorities.


For all of these reasons, undertaking a current reform of local taxation requires an examination of the relevance, beyond the strictly budgetary sense, of giving local and regional authorities the right to decide in such an important field as taxation. Not only because taxation is at the centre of the institutional system but because local democracy is concerned. Furthermore, assuming that a tax reform appears necessary today, it is important to bear in mind the diversity of the economic and social contexts. Numerous reasons that lead us to thinking that the success of such a reform hinges on a multifaceted approach associated with sufficiently thorough field studies.


In other words, this would involve thinking beyond a single context which has been in place for decades, that of sharing taxes between the State and local authorities. This context leads to technically debating over the choice between transferring State taxes or creating new local taxes. Most discussions that took place during the local tax reforms of 1973-1975 were focused on this approach; it arises once again in the Vivre ensemble report from 1976 and again during the debates on eliminating the business tax at the end of the 1990s and even today. And every time the idea is raised to allocate a portion of States taxes such as VAT and/or the social security tax (CSG) or corporate income tax to regions and departments and allocate the property taxes to the municipalities[1]. Yet the current context is very different, which justifies searching for fundamentally new ways of thinking. The financial situation of the State does not allow it to consider deepening its deficit by reducing its resources given that new challenges have arisen leading to new expenses weighing on the public budget (digital development, environmental protection, ageing population, population migration, etc.).


In conclusion, the matter that should be discussed is whether a specific tax associated to additional financing resources should be maintained. Aside from the issues raised above, such a direction assumes that consultation bodies are developed and firmly installed to coordinate the decisions made by the various stakeholders. It is time to adopt an institutional approach for the finances of local authorities adapted to the complexity of the current society.



[1] See Bouvier M., “Local tax autonomy and administrative freedom of local authorities” [Autonomie fiscale locale et libre administration des collectivités locales] in RFFP 2003, 81.

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