Commentary: Why would municipalities attract investors when they receive pitifully little from taxes

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Unfortunately, the Czech Republic is far from being the best in terms of attracting foreign investment. And not even in the region of Central and Eastern Europe. Even though we have an indisputable advantage in terms of geographical location and long industrial tradition, Poland, which is more agile, is running behind us today, but we also have competition from countries such as Germany and Austria. One of the reasons is the setting of the budgetary determination of taxes.

Gone are the days when we were countries with cheap labor close to Western markets for investors. Fortunately, thanks to the increase in wages and high wages from work, we are no longer just a cheap assembly company. But with that, we face new challenges. In terms of attracting foreign investment, today we are competing not only with the countries of the former Eastern Bloc, but also with rich countries such as Germany or Austria.

This fight is literally relentless today. An important trend in logistics and industrial production is decarbonization and the related shortening of transport distances. To meet their sustainability goals, companies are moving their manufacturing plants and logistics centers closer to customers in Western Europe. The experience of disrupting supply chains during recent crises, whether it was the covid-19 pandemic or the start of the war in Ukraine, also plays a role.

In addition to the problems associated with the length of construction procedures and the Czech bureaucracy in general, we have one more fundamental obstacle in the Czech Republic. If we want to build a modern industrial building, we usually encounter resistance from the inhabitants of the affected municipalities. That’s why we commissioned a study from KPMG, which compares what part of the revenue from taxes and levies generated by the production plant in the cadastre will be received by municipalities in the Czech Republic, Germany and Austria.

The comparison is literally tragic for us. The study specifically compares the situation in the Czech Republic, Germany and Austria on the model example of a production plant that has an area of ​​25,000 square meters and employs 140 people. The expected period of operation of the plant without significant changes in parameters is 30 years. During them, the plant will transfer almost 2.8 billion CZK to Czech public budgets. Of this, over two billion will go to the state budget, and the remaining approximately 700 million is divided between the region and the municipality where the plant is located. But the municipality will get by far the least of all – only seven to 101 million, depending on the set property tax coefficients.

In Austria, in the model example, 2.6 billion CZK will flow into public budgets in 30 years from the plant. The municipality will receive around CZK 146 million, i.e. a little over 5.6 percent. Of this amount, real estate tax is only CZK 43 million. The remaining almost 103 million comes from the municipal tax, which is calculated from the gross wages paid by the employees of the given plant. The most advantageous division for the municipality occurs in Germany. There, the plant will generate CZK 4 billion in mandatory levies. Of these, the state budget will keep approximately half, i.e. two billion, i.e. almost the same absolute amount as in the Czech Republic. In Germany, the other half is divided roughly equally between the federal states and municipalities. A specific municipality receives CZK 909 million, mainly from business tax. The property tax is only CZK 52 million out of the total levy.

It is important to point out that the income of a Czech municipality is fundamentally dependent on the amount of the property tax coefficient. If it is used to the maximum for industrial buildings, an entrepreneur in the Czech Republic pays significantly more than in Austria and Germany. This move also alludes to the fact that too high a property tax can be liquidating for smaller local businesses. In principle, a higher coefficient can be set for a specific parcel number, but the council must then justify why foreign company X pays a significantly higher tax than local company Y.

Unlike Germany and Austria, the tax system in the Czech Republic does not motivate municipalities or regions to attract and support entrepreneurs and investors who offer the highest possible wages and achieve the greatest possible profits. Czech municipalities receive almost no part of the levies for employees and do not even have a local share in the company’s profit tax. The Czech Republic is thus a completely unique example in Europe of the demotivation of municipalities and regions towards development and interest in business activities on their territory.

Modern industrial halls are no longer synonymous with dirty industry. They use energy from renewable sources, treat rainwater sparingly, and the emphasis is also on sustainable employee transport. In addition to the infrastructure for electric cars, the projects usually deal with connections to public transport or infrastructure and infrastructure for bicycle transport. The industry brings with it positives such as an increase in wages or subsequent development of services or education in the locality. But of course it also carries a burden. From increased traffic to demands on public services to the impact of the building on the landscape.

With the current setting of the budgetary determination of taxes, this burden on municipalities is basically not systematically compensated at all. Although, according to the mentioned model examples, the companies will bring billions to the public budgets, the affected municipality literally only sees a pittance. And we are not even talking about the municipalities that are in the neighborhood and the externalities associated with industrial production also affect them. They no longer have any direct benefits. The so-called NIMBY (not in my backyard) effect is therefore completely understandable in our conditions.

Therefore, non-systemic solutions must be found in practice to compensate the affected municipalities for industrial production. Investors contribute to the infrastructure or other needs of the given municipality. However, these negotiations are often complicated and lengthy, and this is precisely the reason why the investor will also look around other countries in the region.

I am a realist, which is why I do not expect the incredible number of 6,500 municipalities in the Czech Republic to be reduced in any way in the foreseeable future. But there should definitely be a debate on how to motivate municipalities to develop businesses in their territory. At the same time, we should stop comparing ourselves only to the countries of the former Eastern bloc. If we want to be a successful and self-confident country within the European Union, we must take inspiration from our western neighbors.

The examples of Germany and Austria are of course based on a different historical and territorial-administrative reality. But today’s situation, when Czech municipalities only benefit from a rigid property tax, hinders our economic development. In the future, municipal coffers should definitely receive more funds from the real economic value created on the territory of the given municipality. This will be a fundamental step towards greater competitiveness of the entire Czech Republic.