Fiscal Decentralization in the Czech and Slovak Republics: A Comparative Study of Moral Hazard

Abstract

Fiscal decentralization has provided neither the benefits of decentralization nor an independent revenue source for subnational governments in the Czech and Slovak Republics. In Slovakia political conditions early in the transition led to the relative neglect of revenue transfers from the center. This produced financial stress but also encouraged greater fiscal independence for local governments. It also forced them to seek maximal property tax revenues. The Czech Republic made more substantial transfers to local governments, but the development of fiscal autonomy was stifled as transfers reduced the need for own-source local revenues. The Czech real estate tax has remained nominal, as it was under central planning, and its administration is fraught with moral hazard problems. Thus, the property tax never became a vehicle for generating independent funds, but the prospects for the tax are much brighter in the Slovak Republic. This paper offers several views on why the property tax has been more successful in the Slovak Republic.