The shocking effects of the local government revenue law. "Congratulations to those who understand it"

• - Analyses of the impact of new regulations on local government revenues on their finances reveal various surprising things - admits Prof. Paweł Swianiewicz, director of the National Institute of Territorial Self-Government.
• He adds: - One might expect that basing local government budgets on income tax would increase the gap between more and less affluent municipalities. But that is not what is happening.
• Jakub Banaszek, mayor of Chełm and vice-president of the Association of Polish Cities, does not fully agree with this opinion.
• In his opinion, the Ministry of Finance has adopted an algorithm that means that only some of the local governments of a similar size gain financially.

The amendment to the Act on the Income of Local Government Units, in force since the beginning of this year, introduced completely new principles of their financing. The most important source of local government income - i.e. revenues from PIT and CIT taxes - was based on the shares in the income of taxpayers living or operating in a given commune .

In this way, local government revenues were made independent of changes in the tax system. In addition, parts of the general subsidy were replaced by equalization, educational, development, ecological and supplementary needs , calculated in accordance with algorithms established in the act.

The verification of the introduced regulations - in accordance with statutory provisions - will take place in mid-2026. During the 17th European Economic Congress in Katowice (EEC 2025) in April, we asked local government officials, experts and representatives of the Ministry of Finance to indicate the strengths and weaknesses of this key regulation for the development of municipalities, cities, counties and regions.

In the opinion of Prof. Paweł Swianiewicz, director of the National Institute of Territorial Self-Government (NIST), it is still too early to formulate detailed recommendations regarding further changes in the principles of financing local governments.

For now, we have too little hard data to say anything new compared to what we could say in the fall, when this law was passed. Let's remember that we are still talking about planned amounts in local government budgets for 2025.

- noted Prof. Swianiewicz.

At the same time, he pointed out that the analyses conducted so far regarding the impact of the new regulation on local government finances "have revealed various surprising things".

- One could expect that basing all municipal budgets to a much greater extent on income taxes would result in an increase in the income gap between wealthy and less wealthy local governments - said the NIST director during a debate at EEC 2025 devoted to local government finances.

Meanwhile, the simulations carried out show that such an increase in the range should not be expected. What is more, a certain reduction in the range of income between individual municipalities can be predicted . This is largely due to various types of transitional mechanisms and thresholds adopted in the act.

- explained Prof. Swianiewicz.

He also admitted that it is still difficult to judge whether the trend of flattening the differences in the wealth of individual local governments will continue in the next few years.

- In any case, this year I expect a certain reduction in this range. I think that is good. We should not forget about weaker local governments - he emphasized.

Prof. Paweł Swianiewicz also answered the question of whether, according to the new regulations, subsidies for local governments are distributed in a more transparent manner than in previous years.

Unfortunately not. The amended act on the revenues of local government units is very complicated . I am not saying that it is bad. Maybe it has to be like that, and I think that in the future it will become even more complex. This may turn out to be almost inevitable.

- he stated, pointing out that the act in question contains many provisions that should be corrected in the future.

If there is anyone in this room (during the aforementioned congressional debate on local government finances - ed.), who says that they have read this act, understood it immediately and know exactly how money for local governments is distributed, then I will bow very low to them. Because these regulations are neither simple nor transparent.

- summarized Prof. Paweł Swianiewicz.

According to Jakub Banaszek, the mayor of Chełm and vice-president of the Association of Polish Cities, thanks to the amended act, "there are more funds in local governments and this is an indisputable fact, visible already in the first reports."

However, it also happened that there are serious differences between individual local governments of similar size and population . This results from the algorithm for the distribution of funds adopted in the act.

- stated the local government official.

- Examples include cities such as Lubin, Głogów or Polkowice located in the immediate vicinity of the KGHM mine. Previously, they received a specific share of CIT funds (tax on companies/enterprises, among others - ed.). Today, after the change in the law, the entire stream of money from this source is directed to one local government - Lubin. The remaining cities mentioned lost several or even several dozen million zlotys - said Jakub Banaszek.

- This means that although more funds from subsidies for so-called equalization needs are going to Głogów or Polkowice, these cities do not receive what they could receive if the previous regulations were maintained. This constitutes a disruption of sustainable development - he added.