User Fees in Local Finance: Performance and Potential in the Czech Republic and Slovakia

Abstract

The Czech Republic and Slovakia, like other transition countries in Central and Eastern Europe, have given significant lip service to fiscal decentralization and engaged in public administration reforms. But the subnational governments of their public finance systems still lack relative autonomy, which could be addressed partly through developing independent revenue sources for their municipalities and regions. Currently, such independent revenue sources include the proceeds of a strictly nominal property tax as well as those of a small set of local user fees and taxes designed and approved by the central governments. Together they represent only about 5 percent of total municipal budget revenues. A number of market democracies have used user fees dramatically to generate revenues for local governments, a possibility that remains undiscovered in the Czech Republic and Slovakia. User fees could potentially generate badly needed revenue for the municipal and regional governments of the twin republics. The user fees and taxes currently available to the local governments of the two republics are reviewed, primarily to demonstrate their current, very limited use. The revenue implications of current fees are also addressed, revealing them as little more than nuisance fees. A discussion on the growing significance of user fees globally and their potential for the Czech Republic and Slovakia suggests the possibility for heavier use. Particular attention is paid to the question of charging user fees not only for cost recovery, but to provide some budgetary relief for hard-pressed local authorities in economic transition. A basic theory of optimal, revenue-enhancing user fees is presented.