Croatian Local Governments Maintain Tax Rates Amidst Revenue Growth

Croatian cities and municipalities have largely maintained their 2023 income tax rates, opting not to exercise their autonomous power to adjust them, according to an analysis by the Economic Institute Zagreb. This decision comes despite a significant increase in local government revenues in recent years.

Dubravka Jurlina Alibegović, a senior scientific advisor at the institute, noted that while local governments have seen substantial revenue growth, it cannot be solely attributed to tax rate changes implemented since 2023. The analysis indicates that 508 out of 556 local self-government units kept their income tax rates unchanged from before 2023. This means income continues to be taxed at either the lower rate of 20% or the higher rate of 30% in these areas.

Only a small fraction, 48 municipalities and cities, decided to alter their tax rates. Among those that did, Zagreb, Gospić, Pazin, and Rijeka implemented the highest possible lower tax rate of 22%. Gospić, Rijeka, Split, and Varaždin set the highest possible higher tax rate at 32%. Data from the Tax Administration shows that eight local government units opted for the lowest possible lower rate of 15% last year, while 14 introduced the lowest possible higher rate of 25%.

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The analysis shows that the revenue growth cannot be exclusively linked to changes in tax rates from 2023 onwards.

Jurlina Alibegović offers two potential explanations for why 92% of local government units did not utilize their right to change tax rates. One possibility is that these entities are content with their current revenue levels. Alternatively, local politicians may be hesitant to implement changes that could lead to negative political repercussions.

The analysis also touches upon recent legislative changes that exempt returning emigrants, who have lived abroad for over two years, from income tax for five years. An estimated 13,000 individuals returned to Croatia last year under this provision. Despite these and other factors, all local government units have reported a considerable increase in tax revenues.

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Either cities and municipalities are largely satisfied with the existing level of revenue, or local politicians are cautious about changes they estimate could bring negative political consequences.