Russia’s Federal Subjects have Power to Use Tax Policy to Collect More Money and Attract More Business, Olkhovik Says

Paul Goble

            Staunton, December 28 – Far fewer federal subjects need to be subidized than currently are, Vladimir Olkhovik says, because existing laws allow them to use their tax policies both to attract more business that will ultimately boost tax revenues and also to collect more money than many of them do at the present time.

            Most commentaries on the fact that so many regions have to receive subsidies focus on the fact that regions have to transfer such a high percentage of the taxes they collect to Moscow and ignore the possibilities they in fact have to use their rights to vary tax policies to their own advantage, the Higher School of Economics analyst says.

            Olkhovik says that many more regions could do without subsidies if they would use the powers they have under existing Russian law to boost taxes on certain things, like real property and luxury cars, and to attract more business by giving tax advantages to new investment (“Possibilities for the Development of the Tax Potential of Subjects of the Russian Federation” (in Russian), Ekonomika regiona, 15:3 (2019): 938-951 at publications.hse.ru/articles/307962387, summarized at iq.hse.ru/news/326641216.html).

            He argues that the regions have many possibilities for broadening  their tax base and thus their tax collections, something that means they would retain more money even if they have to transfer the same percentage of taxes collected to Moscow as now and that would allow them to give tax holidays to new investment, thereby expanding their tax base in the future.

            “Many Russian regions as a result of large debts and low tax collections need money from the federal budget,” Olkhovik says. In part that reflects the requirement that they transfer such a high percentage of the taxes collected to the central government; but that is only part of the explanation.

            “One of the causes for the regions’ lack of their own means can be ineffective tax policy,” with regions choosing not to tax some things or at lower rates than they could and thus reducing their resources on their own and not just because of their transfer of tax moneys to Moscow.

            Some regions have been much more effective in taking advantage of these possibilities, he says, than other; and that difference goes a long way toward explaining why some federal subjects are in significantly worse shape than others. Regional officials often don’t recognize their powers in this regard or act in response to changes in Russian tax policies.

            Thus, last year, many regions did not adopt legislation reflecting changes in all-Russian legislation concerning the value of land against which taxes are to be calculated.  As a result, they collected less than ten percent of the taxes they would have been able to had they made this change.

            The Higher School of Economics speciliat adds that many regions are not using their legal powers to lower tax rates for a time on new investments, something that would help them attract more business and build their tax base in the future after those tax holidays end. Instead, they often in a counterproductive way are imposing higher rates on new investment than on old.