Commuting as a factor of local public finance in Estonia

Municipalities are increasingly in direct competition with each other because of the increasing mobility of the population. According to OECD (2005) figures, interregional commuting rates are as high as 16% of resident employment in Germany and the United Kingdom, and higher than 10% in countries like France, the Netherlands and Italy. Accordingly, intraregional commuting; for example, at the municipal level, is even higher and steadily increasing.

The current research aims to provide more insight into the fiscal impacts of commuting at the state level. The research question for this paper is: what is the scope of commuting and what impacts does it have on local governments in Estonia in terms of municipal budget revenues from personal income tax (PIT)?

This study explores the case of Estonia where commuting has a significant and increasing influence on local public finance, mainly because of the specific tax system: the main part of PIT (11.4% of gross salaries) flows to the local government budget of the municipality where the person is registered. The revenue from PIT on average makes up nearly 50% of total budget revenues for Estonian local governments.

In this study we concentrate our attention on the economic influence of commuting on local public finance based on five aspects:

* share of inhabitants going to work

               outside the municipality of residence in the same county and the share of PIT they have brought to the local government budget of the municipality of residence;

                in the county centre and the share of PIT they have brought to the local government budget of municipality of residence;

                outside the county of residence and the share of PIT they have brought to the local government budget of the municipality of residence;

 * share of employees working in enterprises registered in the observed municipality but living outside of this municipality;

 * the outflow of “potential” income from this municipality.

The study is carried out on the basis of data from the Estonian Tax and Customs Board and the comparative data method is used.

This paper is structured as follows: after a brief introduction, the data and methodology of the paper is discussed (section 1). Section 2 discusses the results from different viewpoints and section 3 concludes the study.

Key words: local government, budget revenues, personal income tax, commuting, Estonia