The Estonian Ministry of Finance has given a glimpse into the new coalition's first round of tax changes, including a cut in taxes for higher-paid workers, a 2 percentage point hike in the overall income tax rate, a 2pp rise in VAT, and increased excise duties, ERR.ee, the website of Estonian national broadcaster ERR, said on April 27.
While the income tax changes will have a negative effect on the state budget, this will be offset through other taxes. The public sector in Estonia is currently €1.7 billion in the red – partly because of soaring defence spending – of which the finance ministry hopes to patch €200 with the tax package, ERR.ee said.
The package of proposed bills sent to the coalition partners on April 26 is made up of four separate pieces of draft legislation dealing with income tax, gambling tax and excise duties. The finance ministry expects other ministries to comment on the proposed changes by May 2.
Minister of Finance Mart Vorklaev (Reform) said at a press briefing that the coalition wants to pass the tax changes before Midsummer Day so they could enter into force from next year. The changes in this first package are just the most urgent of the new government's plans for taxes.
Other plans include environmental taxes, introducing a car tax in Estonia and expanding the tax base of local governments, Vorklaev said, adding that more analysis and discussions with target groups are needed first.
Of the proposed measures, the income tax changes have the most profound effect. The Reform Party's election promise of abolishing Estonia's so-called tax hump, will end the tapering of the basic tax exemption and increase the overall exemption from 2025. The current system sees people's basic exemption gradually fall starting from a monthly income of €1,200 to reach €0 at an income level of €2,100.
The ministry's explanatory memo only outlines the fiscal effect of the change in tandem with hiking the income tax rate from 20% to 22%. Planned abolition of various tax exceptions also have a compensatory effect. Tax refunds on home loan interest, spouses and second and third children will be abolished, ERR.ee said.
While corporate tax on distributed profits is set to go up slightly, the effect of changes will be negative for the state budget in the long run. The current option of a reduced tax rate on regular dividends will also disappear, ERR.ee said.
Kadri Klaos, head of the public finances department of the Finance Ministry, said that they expect 20% of corporate profits to be taken out of Estonia after the change.
The second major tax change from the package of measures would see the VAT rate hiked from 20% to 22%. Klaos said that the VAT hike is estimated to hike prices by 1.67% and inflation by 1.4%. Consumption taxes make up 39% of the total tax burden in Estonia.
Another substantial change is abolishing accommodation providers' current special 9% VAT rate. While the coalition initially calculated that this could yield €38 million, the finance ministry finds €20 million to be a more realistic figure if we facture in the resulting drop in tourism, ERR.ee said.
The third part of tax changes unveiled on April 26 concerns hiking excise duties on alcohol and tobacco. These should be hiked by 5% per year, which is expected to yield an additional €10mn-30mn on alcohol and €3.5mn-25mn on tobacco products. The Ministry of Finance's calculations put likely resulting price advance at 2.8% annually for beer and 6.9% for vodka.
To offset the changes, the ministry plans to fix the duty on fiscally marked diesel at the lowest level permitted in the EU. No other changes are planned, meaning that the excise duties on other motor fuels should go ahead next year based on previous plans.
Finally, the coalition also wants to hike gambling taxes, which is forecast to bring €8mn-13mn in additional revenue annually. The finance ministry said in its comment that Estonia's taxation of remote gambling is the lowest in the EU, the same as Malta, and it will make sure the sector remains attractive also in the future.