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How financially independent is the judicial authority?

RFFP n° 142 – 2018

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Editorial

 Editorial

 

Securing the fiscal autonomy of local and regional authorities :

a major political challenge

 

When dealing with an individual or an institution, it is evident that there can be no real freedom without the means to exercise said freedom, and in particular the financial means. However in the case of local and regional authorities the matter lies in the conditions for exercising their freedom of administration that is the subject of a constitutional principle[1], and particularly in terms of what their financial autonomy, also guaranteed by the Constitution, actually means[2]. It may be limited to simply having the autonomy to manage the funds made available to them. In this case, the allocation of general funding in the form of appropriations or even the possibility of freely borrowing from banks is sufficient. However, local and regional authorities then remain dependent and on one another. They do not decide on the amount of appropriations or the borrowing conditions. They do not benefit from their own resources whose proceeds they could freely adapt. Yet, for a political institution such as a municipality, department or region the power to act freely is based essentially on holding fiscal power. In general, there is no political autonomy without fiscal power. In other words, financial autonomy must be understood as management autonomy, which is the foundation, but which is inseparable from fiscal decision-making autonomy. This is what may be concluded from a decision by the Constitutional Court of 12 July 2000 (no. 2000432 DC on the amending finance act for 2000). The highest court was concerned about the scope of the fiscal capacity of local authorities stating that “the rules set out by the law could not result in decreasing the overall resources of the local and regional authorities or reducing the portion of their tax revenues in these resources to the point of hindering their freedom of administration”, without however providing more precise elements for determining a specific threshold to respect.

 

To the extent that neither the Constitution nor the constitutional judge was able to settle a question as fundamental for the future of decentralisation, it would therefore appear logical to turn to the legislator. Accordingly two draft constitutional laws on the freedom of administration of local and regional authorities and the related financial consequences were filed at the initiative of the President of the Senate, one in October 2000[3] and the other in July 2002. However, these two attempts proved unsuccessful and it was not until a constitutional review initiated by the government, the law of 28 March 2003 on the decentralised organisation of the Republic, that a text aimed at formulating financial autonomy and freedom of administration would arise. However this combination of two key elements of decentralization would ultimately prove unsuccessful. And yet, through some quick reading, one would think that the question was definitively settled, in other words, that a principle of financial autonomy integrating management autonomy and fiscal autonomy was established.

 

Accordingly, article 722 appears to devote broad fiscal powers to local and regional authorities. It sets out on the one hand that local and regional authorities may receive all or part of the proceeds of taxes of all kinds and that they may be authorised by statute to determine the basis of assessment and the rates thereof, within the limits set by such statute; on the other hand, that the tax revenues and other own revenue of local and regional authorities represent, for each category of authority, a decisive share of their total revenue.

 

It should also be noted that according to the same article, any transfer of powers between the State and the local and regional authorities must be accompanied by the transfer of revenues equivalent to that given over to the exercise of those powers and that whenever the effect of newly created or extended powers is to increase the expenditure to be borne by local and regional authorities, revenue as determined by statute shall be allocated to said authorities.

 

In this respect, everything leads one to believe that the text confers a solid financial basis for the principle of the freedom of administration by associating it with a principle of financial autonomy which is furthermore recognised by the Constitutional Council[4].

 

The organic law of 29 July 2004 on the financial autonomy of local authorities pursuant to article 722 of the Constitution defined the elements for determining the notion of financial autonomy, and consequently what is meant by “own resources”. And the occasionally heated parliamentary debates which led to the discussion of the law focused, for the most part, on the definition of this notion as it was clear that this was the basis on which fiscal autonomy would depend.

 

For certain elected officials, own resources could only mean the proceeds of taxation whose rates are determined entirely by the local and regional authorities; whereas for others the notion must include a share in the tax proceeds between the State and the local authorities.

 

After challenging discussions between parliamentarians, it was proposed that in addition to the capacity to set taxation rates, set out as a possibility and not an obligation, a second possibility be added : that the law determines “by authority, the rate or a local portion of the basis of assessment”[5]. It was this solution, supported by the minister of the interior, that was ultimately upheld and that enabled the text to be definitively adopted by Parliament on 22 July 2004. It should be added that this “own resources” category includes not only the proceeds of taxes of all kinds but also payments for services rendered, local territory revenues, urban planning investments, financial proceeds and gifts and bequests[6].

 

Furthermore, it was necessary to define the criteria on which financial autonomy would be based. In this respect, the law provides that “for each category of authority, the portion of its own resources is calculated based on the amount of these resources in relation to its total resources excluding loans, resources corresponding to the financing of powers transferred on an experimental basis or through delegation”. Rather than using a single rate[7] (for example 50%, which could have been proposed) it was decided that the portion could not be less, for each category, than the level observed in 2003[8].

 

This approach consisted, to a certain extent, of implicitly determining on a yearly basis whether the fiscal decision-making power of local elected officials was found to be reduced by the multiplication of tax reductions. Clearly, the State would compensate the “lack of earnings”[9] as a result. However, this compensation which has gradually turned into appropriations, was unable to hide the decadence of local fiscal autonomy. And paradoxically, it was at this time when the decentralisation laws of 19821983 were implemented that the local fiscal power would begin to be undermined from within[10]. The 2013 reform would neither stop nor provide an alternative to the process under way for several years that was chipping away at the fiscal autonomy of local authorities by gradually eliminating, through exemptions or deductions, major segments of the main local taxes and replacing them with compensations doomed to be transformed into appropriations. It has on the contrary confirmed a trend towards separating the management autonomy of local resources from fiscal autonomy which has progressively lost its purpose.

 

This change was clearly confirmed with the initial finance act for 2004 that integrated multiple fiscal compensations within a particularly substantial appropriation, the overall operating budget, which in a way conveyed the acceleration of the evolution of local tax towards appropriation. And oddly enough, it was amidst the progressive disappearance of local taxation that the principle of local financial autonomy was instated which could seem to be rooted in a principle of fiscal autonomy. The feeling of witnessing a renewal of local fiscal autonomy was but an illusion. Instead we witnessed the disappearance, which occurred almost imperceptibility, of local tax to the point that the process becomes clear and indisputable with the removal of the professional tax by the LFI for 2010 and today with the housing tax headed in the same direction by the LFI for 2018. The process of scaling back local fiscal autonomy was confirmed by the decision of the Constitutional Council that clearly separated financial autonomy, the principle of which it recognises, from fiscal autonomy considering “that neither article 722 of the Constitution nor any other constitutional provision provides that local and regional authorities benefit from fiscal autonomy”[11]. And this despite the fact that the level of financial autonomy is calculated, according to the organic law of 29 July 2004, based on own resources most of which is constituted by the proceeds of taxes of all kinds and that the vote on the rates as well as potentially determining the rules of the basis of assessment are affirmed by the Constitution.

 

This decision by the constitutional judge added to the “termite effect” resulting from successive reductions that resulted in progressively deconstructing local taxation and seems to confirm that the decadence of fiscal autonomy has until now neither slowed nor found an alternative.

 

This could give the impression that this direction is inevitable especially since the proposals for reform have systematically evoked, over many years, a share in the proceeds of State taxes.

 

Has local fiscal autonomy therefore become anachronistic and doomed to disappear?

 

If this is the case, it would be likely that this disappearance would result in harmful consequences for democracy. Citizens would lose their interest in local institutions; an essential link would be broken with the disappearance of local tax which would no longer directly finance the community where they live. Their relationship built on proximity with the local political power would gradually fade away, with this effect likely accentuating the phenomenon that is currently often criticized of citizens distancing themselves from politics. Furthermore, the quality of financial relations between the local authorities and the State could worsen by only being expressed through one-way and assistance-based relationships likely to exacerbate in the absence of the third possibility represented by autonomous local taxes.

 

Accordingly, admitting that this is an essential component of local democracy which would be impacted by the disappearance or weakening of fiscal power, it is a renewal of the legitimacy of local fiscal autonomy that must be developed and secured.

 

In view of this, it should be noted that the modernisation of local management, that has been implemented and solidly installed for over 30 years, reveals a professionalism that legitimises financial accountability including financial autonomy anchored in decisionmaking autonomy in terms of fiscal matters.

 

This direction requires management autonomy and fiscal autonomy to be combined within financial autonomy and that the degree of autonomy is not considered by category of authority but instead for each of them. Such a direction is accompanied with a strengthening of groups of municipalities.

 

It also important to return to what undermined local financial autonomy as it was called for during the discussions of the draft law for the 2003 constitutional revision. In other words, local fiscal power needs to be given explicit legal legitimacy. To do so, it is important to constitutionalize a principle of fiscal autonomy for the local and regional authorities. This principle requires that these authorities be instated with their own taxes in addition to those which exist. It also involves removing the majority of current reductions as well as limiting the possibility to decide on new reductions in the future. Such measures cannot be designed without a coordinating body composed of at least representatives of the State and local and regional authorities[12]. This involves harmonizing decisions made both in terms of revenues and expenditure. It is not currently possible to conceive of local financial autonomy other than within public financial governance applied in a comprehensive manner.

 

Finally, in addition to securing local fiscal autonomy, it is on a wider scale all local resources that must be secured. A legislature agreement, or a specific programming law would constitute, albeit with recognized flaws, a commitment that may then be concretely expressed in the annual context as a financing law for local authorities.

 

Michel BOUVIER



[1] Article 72: “Under the conditions set out by the law, these authorities are freely administered by elected councils”.

[2] Article 722 of the Constitution.

[3] That the government did not include on the agenda of the National Assembly.

[4] Decision no. 2009599 DC of 29 December 2009.

[5] Article 3.

[6] Consequently, the following are not included in this category: loans, treasury revenues, subsidies and appropriations paid by the State or other local authorities.

[7] A solution ruled out by the parliamentarians due to the risk of having once again to turn to the Constitutional Court.

[8] I.e. 60.8% for the municipalities and intermunicipal bodies (EPCI), 58.6% for departments, 41.7% for regions.

[9] It was at this time that the State was qualified as the “leading local taxpayer”. To be exact, the local taxpayer was replaced by the national taxpayer.

[10] See editorial RFFP no. 141: “Local tax reform: the eternal return”.

[11] Decision no. 2009599 DC of 29 December 2009.

[12] See editorial RFFP no. 140.

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