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On the transfer of a share of the personal income tax to municipal budgets

Case No. 4/2012-13/2012

 

 

THE CONSTITUTIONAL COURT OF THE REPUBLIC OF LITHUANIA

IN THE NAME OF THE REPUBLIC OF LITHUANIA

 

RULING

ON THE COMPLIANCE OF THE PROVISIONS OF THE REPUBLIC OF LITHUANIA’S LAW ON THE METHODOLOGY FOR DETERMINING MUNICIPAL BUDGETARY REVENUE WITH THE CONSTITUTION OF THE REPUBLIC OF LITHUANIA

 

11 June 2015 No. KT17-N11/2015

Vilnius

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court: Elvyra Baltutytė, Vytautas Greičius, Pranas Kuconis, Gediminas Mesonis, Vytas Milius, Egidijus Šileikis, Algirdas Taminskas, and Dainius Žalimas

The court reporter—Daiva Pitrėnaitė

Judge Ernestas Spruogis, acting as the representative of the Vilnius Regional Administrative Court, a petitioner

Kęstutis Glaveckas, a member of the Seimas, acting as the representative of the Seimas of the Republic of Lithuania, the party concerned

The Constitutional Court of the Republic of Lithuania, pursuant to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Article 1 of the Law on the Constitutional Court of the Republic of Lithuania, on 20 May 2015, at the Court’s public hearing, considered constitutional justice case No. 4/2012-13/2012 subsequent to:

1) the petition (No. 1B-7/2012) of a group of members of the Seimas, a petitioner, requesting an investigation into the compliance of Item 2 (wording of 2 December 2009) of Article 3 of the Republic of Lithuania’s Law on the Methodology for Determining Municipal Budget Revenue (wording of 23 October 2001), insofar as the said item prescribes that the share (in percentage terms) of the personal income tax as specified in the Appendix to this law is transferred to a municipal budget, and into the compliance of the Appendix (wording of 2 December 2009) to this law, insofar as it provides that the Vilnius City Municipality is assigned a 40-percent share of the personal income tax, with Articles 29 and 120 and Paragraph 1 of Article 121 of the Constitution of the Republic of Lithuania as well as the constitutional principles of a state under rule of law and responsible governance;

2) the petition (No. 1B-23/2012) of the Vilnius Regional Administrative Court, a petitioner, requesting an investigation into the compliance of Item 2 (wording of 2 December 2009) of Article 3 of the Republic of Lithuania’s Law on the Methodology for Determining Municipal Budget Revenue (wording of 23 October 2001), insofar as the said item provides that the share (in percentage terms) of the personal income tax as specified in the Appendix to this law is transferred to a municipal budget, and into the compliance of the Appendix (wording of 23 October 2001) to this law, insofar as it prescribes that the Vilnius City Municipality is assigned a 40-percent share of the personal income tax, with Articles 29 and 120 and Paragraph 1 of Article 121 of the Constitution of the Republic of Lithuania as well as the constitutional principles of a state under rule of law and responsible governance.

By the Constitutional Court’s decision of 13 May 2015, the aforesaid petitions were joined into one case.

The Constitutional Court

has established:

I

The petitions of the petitioners—a group of members of the Seimas and the Vilnius Regional Administrative Court—are substantiated by the following arguments.

1. Item 2 (wording of 2 December 2009) of Article 3 of the Law on the Methodology for Determining Municipal Budget Revenue (wording of 23 October 2001) (hereinafter also referred to as the Law) and the Appendix to the Law (wordings of 23 October 2001 and 2 December 2009) provide for the possibility of individually limiting the transfer to a municipal budget of the share of the personal income tax (hereinafter also referred to as the PIT) falling on every municipal budget. The different shares (in percentage terms) of the PIT as established for every municipality are transferred to the equalisation fund. By means of the funds of this fund, the procedures of equalising the financial capacity of municipalities are carried out according to the formulas specified in the Law.

Such regulation deviates from the principle of the equality of rights of municipalities and violates the equality of rights of the communities of the administrative units, since, if the receiving of the municipal revenue is limited, one also limits the possibilities of such municipalities to administer public matters through democratically elected representatives and to receive the public services corresponding with the needs of the community and its contribution to the revenue that the municipality could receive.

In addition, the municipalities to which only a share of the PIT collected by them is transferred are prevented from participating equally with the other municipalities in the procedures of financial equalisation and, thus, the essence of equalising the financial capacity of the municipalities is distorted.

According to the petitioners, the shares of the PIT to be allocated to municipalities have been established in the absence of any realistic grounds.

The petitioners recognise the fact that, although the legal situation of all the municipalities specified in the Appendix (wording of 23 October 2001 and 2 December 2009) to the Law is the same, i.e. all of them are territorial-social communities to which the right of self-government is guaranteed, however, in practice, there are certain differences in their social and economic capabilities, therefore, in an attempt to diminish such differences the state has the right to establish a certain equalisation of the financial capacity of municipalities, still, while doing so, it is not allowed to abuse its discretion; the state must use its powers in a responsible and reasonable manner. If the essence of the equalisation of the financial capacity of the municipalities is distorted, by means of such equalisation it becomes impossible to implement the objectives sought, the problems faced by individual municipalities become even more acute, and the constitutional principle of responsible governance is thus violated.

2. With respect to the Vilnius City Municipality, the principle of the equality of rights has been violated in an especially gross manner, since only 40-percent share of the PIT is assigned to it, while this share, if compared with the shares (in percentage terms) of the PIT assigned to the municipalities of other towns and districts, is very small. The share of the PIT assigned to the Vilnius City Municipality, differently from such a share assigned to the Kaunas City Municipality, the Klaipėda City Municipality, and other municipalities, from the moment of the entry into force of the Appendix to the Law until the filing of the petitions with the Constitutional Court has not been increased even once.

3. The impugned legal regulation laid down in Item 2 (wording of 2 December 2009) of Article 3 of the Law violates Article 120 and Paragraph 1 of Article 121 of the Constitution, since, the limitation on the size of the revenue of the municipalities received from the PIT means a limitation on the possibilities of the municipalities to conduct local public matters in an efficient and democratic manner within the competence conferred on them by the Constitution and, in addition, this means a violation of the independence of the municipal budgets. The diminishing of such independence should be regarded as a violation of the guarantee conferred on such local communities that they would be able to participate in the governance of their territories. The need of the state to carry out a certain equalisation of the financial capacity of the municipalities does not mean that it is allowed to deviate from the principles of the independence of the activity and budgets of the municipalities.

The official constitutional doctrine and the provisions of the European Charter of Local Self-Government consolidate a general requirement of ensuring the required funding for performing municipal functions. The impugned legal regulation hinders the municipalities, including the Vilnius City Municipality, from performing the assigned functions freely and in a discretionary manner. Vilnius is the capital of Lithuania, it must represent the entire state, therefore, by means of the impugned legal regulation damage is inflicted not only on the Vilnius City Municipality and its community, but also on the image of the entire state.

The petitioners emphasise that they impugn not the state’s right as such to implement the equalisation of the financial capacity of the municipalities, but rather the legal regulation limiting the receiving of revenue by the municipalities without taking into consideration the requirements of the independence of the activity and budgets of the municipalities, as well as the requirements of the equality of rights, proportionality, and justice, even if such limitation seeks to achieve positive objectives—the equalisation of municipal revenue.

II

In the course of the preparation of the case for the Constitutional Court’s hearing, written explanations were received from Seimas member K. Glaveckas, the representative of the Seimas, the party concerned, in which it is maintained that the impugned provisions of Item 2 (wording of 2 December 2009) of Article 3 of the Law and the Appendix (wordings of 23 October 2001 and 2 December 2009) to the Law are not in conflict with the Constitution. The position of the representative of the party concerned is substantiated by the following arguments.

1. The Appendix to the Law consolidated for the first time the shares (in percentage terms) of the personal income tax assigned to concrete municipal budgets. When such shares were being established, the municipalities were assessed according to the same demographic, social and other indicators that determined the fact that different sources and sizes of revenue were assigned to the municipalities.

Conforming to the provisions of the Law, the share (in percentage terms) assigned to a municipal budget could undergo changes in cases where either the circle of municipal discretionary functions or the tax base is changed. Every year an assessment is carried out whether the funding of the expenditure of municipal budgets for discharging the discretionary functions or the functions of limited discretion for the coming budget year is not decreasing.

2. As such, the different size of the share (in percentage terms) of the PIT assigned to the Vilnius City Municipality does not negate the constitutional principle of the equality of persons. In view of the fact that, if assessed according to the same indicators as the other municipalities, the situation of the Vilnius City Municipality is different, it is possible to suppose that the impugned legal regulation has consolidated the differentiation which is objectively substantiated, i.e., a procedure for the equalisation of the finances of the municipalities was established as provided for in Article 9 of the European Charter of Local Self-Government.

III

In the course of the preparation of the case for the Constitutional Court’s hearing, written opinions were received from Ingrida Šimonytė, the then Minster of Finance of the Republic of Lithuania, Gytis Andrulionis, the then Vice-Minister of Justice of the Republic of Lithuania, Ričardas Malinauskas, President of the Association of Local Authorities in Lithuania, and Prof. Dr. Kostas Žymantas Svetikas of the Institute of Management of the Faculty of Politics and Management of Mykolas Romeris University, as well as letters of the municipalities of the towns of Vilnius, Kaunas, Klaipėda, Panevėžys, and Šiauliai regarding the provision of information.

IV

In the course of the preparation of the case for the judicial consideration, the specialists were questioned—Artūras Kriūka, Deputy Head of the Municipal Budgets Division of the Budget Department of the Ministry of Finance of the Republic of Lithuania and Rita Švedienė, Deputy Director of Audit Department 3 of the National Audit Office of the Republic of Lithuania.

V

1. At the Constitutional Court’s hearing, Judge E. Spruogis, the representative of the Vilnius Regional Administrative Court, a petitioner, virtually reiterated the arguments set forth in the petition and answered the questions of the justices of the Constitutional Court.

2. At the Constitutional Court’s hearing, Seimas member K. Glaveckas, the representative of the Seimas, the party concerned, virtually reiterated the arguments set forth in his written explanations and answered the questions of the justices of the Constitutional Court.

3. At the Constitutional Court’s hearing, the specialist—Rimantas Čapas, Deputy Head of the Municipal Budgets Division of the Budget Department of the Ministry of Finance of the Republic of Lithuania—took the floor and answered the questions.

The Constitutional Court

holds that:

I

1. The petitioners—a group of members of the Seimas and the Vilnius Regional Administrative Court—request an investigation into whether Item 2 (wording of 2 December 2009) of Article 3 of the Law, insofar as the said item prescribes that the share (in percentage terms) of the PIT as specified in the Appendix to the Law is transferred to a municipal budget, and the Appendix (wordings of 23 October 2001 and 2 December 2009) to the Law, insofar as it prescribes that the Vilnius City Municipality is assigned a 40-percent share of the PIT, are (were) in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under rule of law and responsible governance.

2. On 2 July 1997, the Seimas adopted the Law on the Methodology for Determining Municipal Budget Revenue, which came into force on 23 July 1997. This law established the sources of municipal budget revenue and the procedure for calculating, approving, and transferring the grants allocated to the municipal budgets from the State Budget.

The Law on the Methodology for Determining Municipal Budget Revenue has been amended and/or supplemented on more than one occasion, inter alia, by the Republic of Lithuania’s Law Amending the Law on the Methodology for Determining Municipal Budget Revenue that was adopted on 19 October 1999 and by the Republic of Lithuania’s Law Amending the Law on the Methodology for Determining Municipal Budget Revenue that was adopted on 23 October 2001. The said laws set forth the Law on the Methodology for Determining Municipal Budget Revenue in its new wording.

3. Article 3 “Transfer of Tax Revenue and Non-Tax Revenue to Municipal Budgets” of the Law (Item 2 (wording of 2 December 2009) of the said article is impugned by the petitioners) prescribes:

A local state tax inspectorate of the State Tax Inspectorate under the Ministry of Finance, which is the local tax administrator, shall transfer to the municipal budget:

1) tax revenue assigned to the municipal budget;

2) the share of the personal income tax (in percentage terms) referred to in the Appendix to this Law, upon deducting from the calculated amount of the personal income tax the revenue for issued business certificates and the shares of this tax (in percentage terms) approved by the Law on the Approval of Financial Indicators of the State Budget and Municipal Budgets for the respective year to the Budget of the Compulsory Health Insurance Fund and to the State Budget, where such a share (shares) has (have) been provided for. The remaining part of the personal income tax shall be transferred to the account of the State Treasury.

3) non-tax revenue paid to the municipal budget by natural and legal persons under the law.”

Thus, Article 3 (wording of 2 December 2009) of the Law prescribes which tax revenue and non-tax revenue must be transferred to the municipal budgets.

Under Item 2 (wording of 2 December 2009) of Article 3 of the Law, the share (in percentage terms) of the PIT provided individually for every municipality in the Appendix to the Law is transferred to the respective municipal budgets. This share for every municipality is established on the amount received upon deducting from the calculated amount of the PIT the revenue for issued business certificates and the shares of this tax (in percentage terms) approved by the Law on the Approval of the Financial Indicators of the State Budget and Municipal Budgets for the respective year to the Budget of the Compulsory Health Insurance Fund and to the State Budget, where such shares have been provided for. The other share of the revenue received from this tax remaining after the share of the PIT specified in the Appendix to the Law is transferred to the respective municipality must be transferred to the account of the State Treasury.

4. The legal regulation impugned by the petitioners should be interpreted in the context of the other provisions of the Law (which were in force at the time of the emergence of the dispute that is being solved in the case considered by the Vilnius Regional Administrative Court and which are in force at present).

4.1. Paragraph 1 (wordings of 29 November 2011 and 4 December 2014) of Article 10 of the Law provides that the Government shall, upon considering with the Association of Local Authorities in Lithuania, submit annually to the Seimas for approval certain annual indicators, inter alia, the share of the PIT (in percentage terms) assigned to all the municipal budgets on this tax revenue of the consolidated state budget and the consolidated municipal budgets (with the exception of the fixed-size PIT paid on the revenue received from the activity exercised under a business certificate); the share of the PIT for the coming year is calculated by correcting the share of the PIT of the current year and by taking account of the changes in the municipal revenue or expenditure where such changes were determined by means of decisions adopted either by the Seimas or the Government.

Thus, according to this provision of the Law, every year, by taking account of changes in the municipal revenue or expenditure determined by means of decisions adopted either by the Seimas or the Government, a share of the PIT (in percentage terms) is established to be assigned to all the municipal budgets and, respectively, a particular share to be transferred to the State Budget.

4.2. Article 6 (wording of 10 December 2002) of the Law provides that share of the PIT (in percentage terms) of individual municipalities transferred by the local tax administrators to the account of the State Treasury is assigned for equalising the PIT and differences in the expenditure structure of municipalities conditioned by objective factors beyond the control of the municipalities.

4.2.1. Under Paragraph 1 (wording of 10 December 2002) of Article 7 of the Law, the share of the funds transferred by the local tax administrators to the account of the State Treasury for equalising the PIT of municipalities is used to support the municipalities whose actual revenue per capita from the PIT for the previous month is below the actual average revenue of all the municipalities per capita from the PIT for the previous month, i.e., it is used to support the municipalities whose per capita revenue from the PIT, upon transferring them the share established in the Appendix to the Law, is lower than the average PIT revenue in this country.

Thus, according to this provision, the municipal revenue per capita from the PIT is equalised by taking into consideration only the share of the PIT specified in the Law.

4.2.2. In performing the equalisation of the financial capacity of municipalities, the differences in the municipal expenditure structures are also equalised. According to Paragraph 2 of Article 8 and Paragraph 1 (wording of 3 July 2008) of Article 9 of the Law, funds for equalising differences in the expenditure structure of municipalities are allocated to a municipality having regard to its share of all municipalities’ demographic, social and other indicators (such as the length of local roads and streets, the area of the territory of the municipality, the number of residents who have attained retirement age, the number of children of certain age, the built-up area of the territory of the municipality, etc.) affecting objective changes in the differences of the expenditure structure of municipalities and the weight of these indicators (coefficients indicating such weight).

4.2.3. Paragraph 3 (wording of 10 December 2002) of Article 8 of the Law prescribes that, when calculating the funds allocated for the equalisation of differences in the expenditure structure of the municipalities according to specific formulas, such calculation is based on the value of the aforesaid indicators of only those municipalities whose share of the PIT approved by the Appendix to this Law is equal to 100 percent.

Consequently, no account is taken of the demographic, social, and other indicators (affecting objective changes in the differences of the municipal expenditure structure) of the municipalities to which, under the Appendix to the Law, a share of the PIT lesser than 100 percent is assigned, and no funds are allocated to such municipalities for equalising differences in the expenditure structure.

4.2.4. To sum up the above legal regulation, it should be noted that:

  • the legislature has consolidated a certain mechanism for equalising the differences between the revenue of municipalities received from the PIT and the expenditure structures of municipalities; the essence of such a mechanism is the distribution of a part of the PIT in an effort to equalise per capita revenue of municipalities received from the PIT and the differences in the expenditure structures conditioned by objective, social, and other factors;

  • in order to equalise the revenue received by the municipalities from the PIT and the differences in the expenditure structure of the municipalities conditioned by objective factors beyond their control, a certain share of the PIT (in percentage terms) of individual municipalities is assigned (where such a share remains from the amount of the share specified in the Appendix to the Law and is transferred by the local tax administrator to the account of the State Treasury);

  • in carrying out the equalisation of the revenue received by the municipalities from the PIT, the support is given to the municipalities whose per capita revenue from the PIT, upon transferring them the share established in the Appendix to the Law, is lower than the average PIT revenue in this country;

  • funds for equalising differences in the expenditure structure of the municipalities are allocated to a municipality having regard to its share of all municipalities’ demographic, social and other indicators affecting objective changes in the differences of the expenditure structure of the municipalities and the weight of these indicators;

  • no funds for equalising differences in the expenditure structure are allocated to municipalities to which, under the Appendix to the Law, a share of the PIT lesser than 100 percent is assigned.

4.3. According to Articles 2 and 4 of the Law, in addition to tax revenue and non-tax revenue that is transferred to the municipal budgets according to Article 3 (wording of 2 December 2009) of the Law, the revenue of the municipal budgets also comprises state budget grants the procedure of the calculation, approval and transfer of which is established in the Law.

4.3.1. Under Article 5 (wording of 23 November 2010) of the Law, the following grants may be allocated to the municipalities:

  • general grants from the State Budget are allocated for equalising differences in the PIT and the municipal expenditure structure conditioned by objective factors beyond the control of the municipalities, when it is expected that there will be a shortage of funds for this purpose in the account of the State Treasury;

  • the special targeted grants of the State Budget to the municipal budgets are allocated for the performance of state (delegated by the state to the municipalities) functions, and for implementing the programmes approved or decisions adopted by the Seimas or the Government;

  • compensation of the general grant of the State Budget is allocated to compensate for changes in municipal budget revenue and expenditure arising due to the decisions adopted by the Seimas or the Government.

4.3.2. Paragraph 5 (wordings of 29 November 2011 and 4 December 2014) of Article 10 of the Law prescribes that where the Seimas or the Government adopt, during the budget year, or intend to adopt, during the coming budget year, the decisions resulting in changes with respect of municipal budget revenue and expenditure, such changes in revenue and expenditure are subject to compensation, with the exception of the amounts by which municipal budgets decrease due to the tax on lease of state-owned land within the territory of a free economic zone used to purchase the land located in this territory from land owners; the required amount of compensation of the general grant from the State Budget relating to the changes in municipal revenue and expenditure must be allocated, or the required amounts must be deducted from municipal budgets in the budget year, and in the coming budget year the share of the PIT in the budgets of all municipalities must be adjusted. Compensation of the general grant from the State Budget, also the amounts deducted from municipal budgets and relating to the changes in municipal revenue and expenditure are calculated in a different manner by taking into consideration the fact whether the decisions adopted either by the Seimas or the Government exert the same influence on all the municipalities or only on some of them (Paragraph 6 (wording of 29 November 2011) of Article 10).

4.4. Paragraph 2 (wording of 29 November 2011) of Article 10 of the Law prescribes that the Law on the Approval of the Financial Indicators of the State Budget and Municipal Budgets for the year concerned may provide for the financial indicator of the expected revenue of the municipalities; when calculating this indicator, the revenue of municipal budgetary establishments, local taxes and the revenue assigned under the Republic of Lithuania’s Law on the Special Municipal Environmental Protection Support Programme are excluded.

Paragraph 1 (wording of 23 December 2008) of Article 12 of the Law provides that draft laws on the approval of financial indicators of the State Budget and municipal budgets shall provide for general grant compensation in the required amount from the State Budget to municipal budgets intended to compensate at the rate of 100 percent for decrease in revenue (excluding special targeted grants and revenue from local taxes) forecasted for the coming budget year under comparative limits and conditions as compared with the revenue calculated in the current budget year.

According to Paragraph 2 (wordings of 23 December 2008 and 12 December 2013) of the same article, draft laws on the approval of financial indicators of the State Budget and municipal budgets provide for compensation of the state budget general grant in the required amount to the State Budget from the municipalities whose revenue (excluding special targeted grants and revenue from local taxes) forecasted for the coming budget year under comparative limits and conditions increases by over 21 percent as compared with the revenue calculated in the current budget year.

4.5. To sum up the above regal regulation, it should be held that state budget grants—state budget general grants, special targeted grants, and compensation of the general grant—are one of the sources of the revenue of the municipal budgets.

Compensation of the general grant is allocated to compensate for changes (with the exception of certain changes) of municipal budget revenue and expenditure arising due to the decisions adopted by the Seimas or the Government during the budget year, or intended to adopt during the coming budget year, or to compensate at the rate of 100 percent for decrease in revenue forecasted for the coming budget year under comparative limits and conditions as compared with the revenue calculated in the current budget year; if the revenue increases by more than 21 percent, such compensation is transferred to the State Budget.

5. In order to interpret the provisions of the Law in a systemic manner, in the context of the constitutional justice case at issue, the following should be noted:

  • the share of the PIT allocated to all the municipal budgets is respectively corrected if either the Seimas or the Government adopts the decisions determining changes in the expenditure or revenue of the municipalities;

  • a fixed share (in percentage terms) of the PIT established on the respective size of this tax, where such a share is provided for individually for every municipality in the Appendix to the Law, is transferred to the respective municipal budgets;

  • the share of the PIT remaining from that provided for in the Appendix to the Law is distributed among the municipalities by taking account of per capita revenue received by a concrete municipality from the PIT and having regard to its share of all municipalities’ demographic, social and other indicators affecting objective changes in the differences of the expenditure structure of municipalities and the weight of these indicators;

  • municipalities may be allocated compensation of the general grant from the State Budget to compensate at the rate of 100 percent, inter alia, for decrease in revenue forecasted for the coming budget year under comparative limits and conditions as compared with the revenue calculated in the current budget year; if the revenue increases by more than 21 percent, such compensation is transferred to the State Budget.

6. The Appendix (its wording of 23 October 2001 with subsequent amendments that is impugned, to a certain extent, by the petitioners) to the Law established the shares (in percentage terms) of the PIT on the amount received upon deducting from the calculated amount of the PIT both the revenue for issued business certificates and the share of this tax to be transferred for the State Budget (as well as the respective share to be transferred to the Budget of the Compulsory Health Insurance Fund, where such a share has been provided for).

6.1. The Appendix to the Law prescribed that the share of the PIT allocated to municipalities would be the following: to the Vilnius City Municipality—40 percent; to the Kaunas City Municipality—74 percent; to the Klaipėda City Municipality—64 percent; to the Palanga Town Municipality—70 percent; to the Panevėžys City Municipality—84 percent; to the Šiauliai City Municipality—96 percent; to the Ignalina District Municipality—78 percent; to the Mažeikiai District Municipality—55 percent; to other municipalities—100 percent.

Thus, according to the Appendix to the Law, different percentage shares of the PIT would be transferred to the respective municipal budgets and the corresponding remaining share would be transferred to the account of the State Treasury.

6.2. The legal regulation laid down in the Appendix to the Law has been amended on more than one occasion by means of the following laws:

  • the Republic of Lithuania’s Law Amending Articles 3, 5, 6, 7, 8, 9, 10 of the Law on the Methodology for Determining Municipal Budget Revenue and the Appendix Thereto that was adopted on 10 December 2002 by which it was prescribed that the share of the PIT allocated to the Ignalina District Municipality would be 100 percent (Paragraph 3 of Article 8);

  • the Republic of Lithuania’s Law Amending Article 12 of the Law on the Methodology for Determining Municipal Budget Revenue and the Appendix Thereto that was adopted on 8 December 2005 by which it was prescribed that the share of the PIT allocated to the Palanga Town Municipality would be 100 percent and that such a share allocated to the Mažeikiai District Municipality would be 90 percent (Article 2);

  • the Republic of Lithuania’s Law Amending and Supplementing Articles 3, 10, 12 of the Law on the Methodology for Determining Municipal Budget Revenue and the Appendix Thereto that was adopted on 2 December 2009 by which it was prescribed that the share of the PIT allocated to the Kaunas City Municipality would be 94 percent; to the Klaipėda City Municipality—86 percent; to the Panevėžys City Municipality—100 percent; to the Šiauliai City Municipality—100 percent; to the Mažeikiai District Municipality—95 percent (Article 4);

  • the Republic of Lithuania’s Law Amending the Appendix to the Law on the Methodology for Determining Municipal Budget Revenue that was adopted on 20 December 2012 by which it was prescribed that that the share of the PIT allocated to the Vilnius City Municipality would be 42 percent and that such a share allocated to the Mažeikiai District Municipality would be 99 percent (Article 1);

  • the Republic of Lithuania’s Law Amending Articles 10, 12, 13 of the Law on the Methodology for Determining Municipal Budget Revenue and the Appendix Thereto that was adopted on 12 December 2013 by which it was prescribed the share of the PIT allocated to the Vilnius City Municipality would be 48 percent and that such a share allocated to the Mažeikiai District Municipality would be 100 percent (Article 4).

6.3. To sum up the development of the above legal regulation, it is obvious that after the shares (in percentage terms) to be allocated to municipalities had been established for the first time in the Appendix to the Law, there were eight municipalities the share of the PIT collected by which used to be transferred to the account of the State Treasury in order to carry out the equalisation of the financial capacity: such municipalities were the municipalities of the towns of Vilnius, Kaunas, Palanga, and Šiauliai, as well as those of the districts of Ignalina and Mažeikiai. Afterwards, after the share of the PIT allocated to some of the said municipalities had been increased up to 100 percent, according to the Appendix (wording of 12 December 2013) to the Law, there remained only three municipalities the share of the PIT collected by which had to be transferred to the account of the State in order to carry out the equalisation of the financial capacity.

It should be noted that the impugned legal regulation laid down in the Appendix to the Law, according to which the Vilnius City Municipality is allocated a 40-percent share of the PIT had not been amended until 20 December 2012, when the share of the PIT allocated to the Vilnius City Municipality was increased up to 42 percent by the Law Amending the Appendix to the Law on the Methodology for Determining Municipal Budget Revenue. The Law Amending Articles 10, 12, 13 of the Law on the Methodology for Determining Municipal Budget Revenue and the Appendix Thereto that was adopted on 12 December 2013 increased the said share up to 48 percent.

6.4. In the context of the constitutional justice case at issue, it should be mentioned that it is clear from the travaux préparatoires of the laws amending the Law which increased the shares of the PIT allocated to municipalities that this was done due to various reasons. The share of the PIT allocated to the Ignalina District Municipality was increased due to the changing of the limits of the territories of the Visaginas Town Municipality and the Ignalina District Municipality that had determined the respective changes in the forecasted indicators of tax revenue and non-tax revenue and the demographic, social, and other indicators of those municipalities. The reason of the increase of the share of the PIT allocated to the Palanga Town Municipality and the Mažeikiai District Municipality was that fact that the revenue of the budgets of those municipalities received from taxes and other income had been decreasing and had not been able to cover their expenditure for discharging their discretionary functions or their functions of limited discretion, therefore, the respective compensation of the general grant from the State Budget had to be allocated to those municipalities (after the share of the PIT allocated to the said municipalities had been increased, the local tax administrator did not have to transfer the corresponding share of the PIT to the account of the State Treasury and one did not have to allocate compensation of the general grant from the State Budget for covering the decrease in revenue). For the same reason, in 2009, the shares of the PIT allocated to the municipalities of the cities of Kaunas, Klaipėda, Panevėžys, and Šiauliai, as well as to the Mažeikiai District Municipality, were increased, while, in 2012, in view of the fact that the changes in the tax base had influenced the revenue of the Vilnius City Municipality and the Mažeikiai District Municipality, the shares of the said tax were increased for those municipalities as well; in 2013, the share of the PIT allocated to the Mažeikiai District Municipality was increased one more time. Thus, these changes sought to decrease the compensation of the general grant from the State Budget paid to the said municipalities in order to cover the decrease of revenue by increasing their revenue received from the PIT.

The explanatory note to the draft Law Amending Articles 10, 12, 13 of the Law on the Methodology for Determining Municipal Budget Revenue and the Appendix Thereto that was adopted on 12 December 2013 points out that the Vilnius City Municipality would be able to use the increased source of the revenue from the PIT for paying off its debts. It is clear from the said explanatory note that the share of the PIT was allocated to the Vilnius City Municipality for paying off the existing debts, but not for covering either the decrease of revenue or the increased expenditure.

Thus, the shares (in percentage terms) of the PIT allocated to municipalities have been amended after the territory of the respective municipality was changed, or after the revenue of the municipality decreased, and where it was necessary to allocate such a municipality compensation of the general grant from the State Budget, and in an attempt to provide help in order to meet debt obligations. No law contains or has ever established (any) such grounds for changing the shares of the PIT allocated to the municipalities or the criteria for calculating such shares.

II

1. In the constitutional justice case at issue, the Constitutional Court investigates the compliance of the impugned provisions of the Law with Articles 29 and 120, as well as Paragraph 1 of Article 121 of the Constitution, and with the constitutional principles of a state under the rule of law and responsible governance.

2. Article 120 of the Constitution prescribes that the state shall support municipalities and that municipalities shall act freely and independently within their competence defined by the Constitution and laws.

2.1. The Constitutional Court has held that these provisions mean, inter alia, that an interrelation exists between the governance of the state and local self-government, which manifests itself, among other things, in the fact that the centralised governance of the state in the territorial administrative units is combined with de-centralisation, in the fact that laws consolidate the cooperation of institutions of central authority and municipalities, in the fact that the state supports municipalities in various ways and forms, as well as that the state, in the forms established by law, supervises the activity of municipalities and coordinates joint actions of the state and municipalities when important social objectives are being sought (inter alia, the Constitutional Court’s rulings of 24 December 2002 and 8 July 2005).

2.2. The independence of municipalities and freedom of their activities within the competence defined by the Constitution and laws are constitutional principles (the Constitutional Court’s rulings of 24 December 2002, 13 December 2004, and 21 June 2011). This provision of the Constitution should be regarded as a guarantee of the participation of local communities in the governance of these territories (inter alia, the Constitutional Court’s rulings of 28 June 2001, 14 January 2002, 8 July 2005, and 21 June 2011).

3. Paragraph 1 of Article 121 of the Constitution prescribes that municipalities shall draft and approve their budgets.

In its ruling of 14 January 2002, the Constitutional Court held that, under the Constitution, the independence of municipal budgets is an important aspect of the constitutional principle of the independence of municipalities within the limits of their competence as defined by the Constitution and laws, and that the independence of municipalities in the sphere of the budget is not absolute.

4. The Constitutional Court has held that the legislature has the right to establish, by law, what functions (either all or only some of them to a certain extent) are assigned to municipalities (the Constitutional Court’s rulings of 8 July 2005 and 21 January 2008). The constitutional provision that municipalities shall act freely and independently within their competence defined by the Constitution and laws also means that, in case certain functions are assigned to municipalities by the Constitution or laws, the municipalities perform such functions within the assigned limits (the Constitutional Court’s rulings of 24 December 2002, 13 December 2004, 8 July 2005, and 21 January 2008). It is not permitted to assign any such functions to municipal institutions that they would be unable to perform (the Constitutional Court’s rulings of 14 January 2002, 8 July 2005, and 21 December 2006).

The constitutionally consolidated independence of the activity of municipalities within their competence as defined by the Constitution and laws implies the fact that, in case the functions of the state are transferred by law to municipalities, as well as in case laws or other legal acts create certain duties for municipalities, the funds needed for the performance of these functions (fulfilment of duties) must be provided for as well; according to the Constitution, municipalities must execute laws, thus, including the laws by which municipalities are obligated to perform the state functions that are assigned to them; the funds that are needed in order to ensure the fully fledged functioning of self-government and the performance of the municipal functions must be provided for in the State Budget (the Constitutional Court’s rulings of 14 January 2002, 24 December 2002, 13 December 2004, 8 July 2005, and 21 December 2006).

The Constitutional Court has noted that the constitutional duty of the legislature to establish the legal regulation so that, having taken account of the resources together with the material and financial capacity of the state and society, as well as other important factors, the funding for municipal functions might be guaranteed, does not deny the duty of municipalities (their institutions or officials) to adopt the respective decisions, within the competence defined by the Constitution or laws, so that the funds needed for performing their functions would be collected and these funds would be used in a proper manner; the aforesaid constitutional duty of the legislature does not deny the responsibility of the municipalities (their institutions or officials) to properly carry out the functions transferred to them (the Constitutional Court’s rulings of 8 July 2005 and 21 December 2006).

5. The funds (revenue and its sources) for municipalities are provided for in the State Budget; while providing for such funds in the State Budget, the Seimas is bound by the laws that it itself has adopted, including those defining as to how the funds of the State Budget for the municipalities are calculated, under what procedure they are allocated, how tax revenue or portions of taxes established by law are forecasted for municipal budgets etc. (the Constitutional Court’s ruling of 14 January 2002).

6. Under the Constitution, the Seimas, as the legislative state institution, and the Government, as a state institution of the executive, have a very broad discretion to form and pursue the state economic policy (each according to its competence), certainly, without violating the Constitution and laws under any circumstances, inter alia, without exceeding the powers of these state institutions established therein, by heeding the requirements of the due process of law stemming from the Constitution, the principles of a state under the rule of law, the separation of powers, responsible governance, the protection of legitimate expectations, legal clarity, legal certainty, and legal security consolidated in the Constitution (the Constitutional Court’s rulings of 31 May 2006 and 21 December 2006).

The Constitutional Court has held on more than one occasion that law, when it regulates social relations (including those related to the national economy), defines the limits of the content of the state policy (the economic policy as well) and establishes permissible legal measures and methods for carrying out the said policy. However, in itself, this does not deny the autonomy of the political process or the specificity of forming and pursuing the state policy (the economic policy as well), or the independence of the legislative and executive powers, as state political powers, or the discretion of the institutions, which are formed in a democratic way, in establishing (according to their competence) the content of the state policy (the economic policy as well) (by choosing, inter alia, its priorities), and also the legal measures and methods for pursuing the said policy (the Constitutional Court’s rulings of 31 May 2006 and 21 December 2006).

As such, an assessment of the content (inter alia, priorities), measures and methods of the state economic policy (regardless of who assesses them), including the aspect of their reasonableness and expediency, even if it turns out later that there were better alternatives for choosing the economic policy (thus, also the fact that this economic policy formulated and carried out previously might reasonably be assessed negatively from the aspect of reasonableness and expediency) cannot be a reason to question the compliance of the legal regulation of an economic activity conforming to the said economic policy (formulated and carried out before) with the legislation of higher legal force, inter alia, with the Constitution (also by initiating the respective constitutional justice cases at the Constitutional Court), with the exception of the situation where such legal regulation already at the time of its setting forth in legal acts was clearly directed against the welfare of the nation, the interests of the State of Lithuania and its society and clearly denied the values defended and protected by the Constitution (the Constitutional Court’s rulings of 31 May 2006, 26 September 2006, and 21 December 2006, its decision of 13 November 2007, and its ruling of 2 March 2009).

7. In the context of the constitutional justice case at issue, it should be noted that the legislature enjoys the discretion to choose the priorities in funding the municipalities, as well as the ways and forms by which the state supports the municipalities, including the way of the calculation of the funds of the State Budget meant for municipalities and the manner of the allocation of such funds, however, in doing so, the legislature must heed the Constitution, inter alia, the imperatives of ensuring the funding required for a fully fledged functioning of self-government and for the implementation of municipal functions, which is consolidated in Article 120 and Paragraph 1 of Article 121 of the Constitution, and must heed the constitutional principles of responsible governance and proportionality, according to which the funding of municipal functions must be adequate to the extent of such functions. The duty arises for the legislature from these constitutional imperatives to establish the legal regulation whereby, in proportion to the requirement for funding the functions performed by the municipalities, funds for financing municipal functions would be allocated, inter alia, by transferring certain taxes (a share thereof) to municipalities, where account is taken of the resources as well as material and financial possibilities of the state and society.

After the legislature has imposed the personal income tax as one of the sources for fulfilling the functions of the state (municipality) and has resolved that this tax is allocated to municipalities in order to fund their activities, the duty arises for the legislature from Article 120 and Paragraph 1 of Article 212 of the Constitution and from the constitutional principles of responsible governance and proportionality to establish the legal regulation by which the funds received from the personal income tax, as well as all other funds allocated for financing municipal functions would be distributed in proportion to the extent of the functions performed by the municipalities.

The Constitutional Court has noted that, in case the extent of the functions assigned to the municipalities is changed, the legislature may and in some cases even must respectively amend (either increase or decrease) the funding of the municipal functions (the Constitutional Court’s ruling of 8 July 2005).

In the context of the constitutional justice case at issue, it should also be noted that the duty of the legislature arises from the Constitution, inter alia, from Article 120 and Paragraph 1 of Article 121 thereof, to establish the legal regulation whereby the funding of municipal functions could be respectively amended (either increased or decreased) not only in the cases where the extent of municipal functions is changed, but also when the need for funds undergoes changes due to other objective reasons, as, for instance, demographic or economic changes.

8. In the context of the constitutional justice case at issue, it should also be noted that, under the Constitution, inter alia, under Article 120 and Paragraph 1 of Article 121 thereof, the legislature, in an effort to ensure the funding required for a fully fledged functioning of self-government and the implementation of municipal functions and by taking into account the differences in the social and economic development of regions, may choose a model for equalising the financial capacity of municipalities and establish the respective mechanism for such equalisation. In doing so, the legislature must heed the Constitution, inter alia, the constitutional principle of a state under the rule of law whereby the legal regulation laid down in laws and other legal acts must be clear, comprehensible, and coherent, and must heed the constitutional principle of responsible governance, by which the state institutions and officials must properly exercise the powers conferred on them according to the Constitution and laws.

According to Article 120 and Paragraph 1 of Article 121 of the Constitution, when they are interpreted in conjunction with the constitutional principle of a state under the rule of law, which encompasses the requirements of legal certainty, legal clarity, legal security, and the protection of legitimate expectations, and in conjunction with the constitutional principle of responsible governance, the legislature must establish a clear procedure for calculating the funds allocated to the municipalities, where such a procedure would ensure the funding required for a fully fledged functioning of self-government and for the fulfilment of municipal functions, and, alongside, would ensure the independence and freedom of activity of municipalities within their competence as defined by the Constitution and laws.

9. While interpreting the provisions of Article 29 of the Constitution, the Constitutional Court has held on more than one occasion that the constitutional principle of the equality of all persons before the law, as consolidated in the said article, requires that fundamental rights and duties be established in law equally to all; this principle means the right of a person to be treated equally with others; it imposes the obligation to assess homogenous facts in the same manner and prohibits any arbitrary assessment of essentially the same facts in a different manner, however, it does not deny a differentiated legal regulation, established by law, with respect to certain categories of persons who are in different situations. The constitutional principle of the equality of persons before the law would be violated if certain persons or groups of such persons were treated in a different manner, even though there are no differences of such a character and to such an extent between the said groups of persons so that their uneven treatment could be objectively justified (inter alia, the Constitutional Court’s rulings of 29 June 2012, 15 February 2013, and 6 February 2015); in assessing whether a certain established differentiated legal regulation is well-grounded, it is necessary to take into account concrete legal circumstances; first of all, consideration must be given to differences in the legal situation of the subjects and objects to which a certain differentiated legal regulation is applied (inter alia, the Constitutional Court’s rulings of 29 June 2010, 6 February 2012, 22 February 2013, and 6 February 2015).

The principle of the equality of rights of persons, which is consolidated in the Constitution, inter alia, Article 29 thereof, is inseparable from the constitutional principle of a state under the rule of law, which is a universal principle, upon which the entire Lithuanian legal system and the Constitution itself are based (inter alia, the Constitutional Court’s rulings of 28 May 2010, 15 February 2013, and 6 February 2015).

III

1. In the context of the constitutional justice case at issue, it should be mentioned that the grounds for regulating the funding of municipalities and the equalisation of their financial capacity are consolidated in the respective provisions of the documents of the Council of Europe.

1.1. Article 9 of the European Charter of Local Self-Government that regulates financial resources of local authorities provides, inter alia, that local authorities’ financial resources shall be commensurate with the responsibilities provided for by the constitution and the law; the financial systems on which resources available to local authorities are based shall be of a sufficiently diversified and buoyant nature to enable them to keep pace as far as practically possible with the real evolution of the cost of carrying out their tasks; the protection of financially weaker local authorities calls for the institution of financial equalisation procedures or equivalent measures which are designed to correct the effects of the unequal distribution of potential sources of finance and of the financial burden they must support. Such procedures or measures shall not diminish the discretion local authorities may exercise within their own sphere of responsibility.

1.2. Recommendation Rec(2000)14 of the Committee of Ministers of the Council of Europe to member states on local taxation, financial equalisation and grants to local authorities (adopted on 6 September 2000), considering, inter alia, that local taxation, financial equalisation mechanisms and state grants should be adapted to the needs of local communities in order to optimise the effectiveness of the activity of their authorities, recommends the governments of member states to ensure, among other things, a fair distribution of public financial resources between the different tiers of government, taking account of the responsibilities assigned to each of these tiers and their evolution. The Appendix to this Recommendation states that a substantial degree of financial equalisation is a necessary condition of fiscal decentralisation and a strong local government.

1.3. The Appendix to the Recommendation Rec(2005)1 of the Committee of Ministers to member states on the financial resources of local and regional authorities (adopted on 19 January 2005) contains the financial equalisation guidelines addressed to central and local authorities: local authorities should be provided with appropriate information about the way in which equalisation systems work, for they cannot accept a system with which they are unfamiliar or which they do not understand; the extent to which local authorities with above average per capita revenues are expected to contribute to horizontal redistribution should not be so great, however, as to discourage them from the exploitation and development of their revenue base; the desired degree of equalisation of disparities in spending needs and in financial capacity should be clearly and foreseeably specified; equalisation systems should specify openly and foreseeably which local parties are eligible for financial transfers to equalise financial capacity and spending needs; eligibility criteria should be laid down by law.

2. It should be noted that in the Member States of the European Union, as well as in other states, various models of equalising the financial capacity of local authorities are applied, which differ according to the subjects taking part in the process of equalising the financial capacity of local authorities, the object of the equalisation (depending on whether revenue or expenditure is being equalised) and the sources of the funds by means of which this equalisation is carried out.

The models of vertical and horizontal equalisation are distinguished: according to the model of vertical equalisation, the redistribution of funds is carried out from a higher authority with respect to administrative units (municipalities), while according to the model of horizontal equalisation, the redistribution is carried out among the territorial-administrative units of the same level (regions, municipalities, etc.) (resources are taken from financially stronger municipalities and given to those whose situation is less favourable).

Both municipal revenue and municipal expenditure may serve as objects of equalisation. Revenue (most often, tax) equalisation seeks to reduce the differences in per capita revenue of a municipality in state territorial administrative units of the same level. Expenditure equalisation seeks to compensate for bigger expenditure incurred by some territorial administrative units due to the geographical, social, economic or other peculiarities, or for cost differences in providing public services.

The equalisation of the financial capacity of municipalities may be carried out either by means of taxes—either by local taxes (where financially stronger municipalities transfer a certain percentage share of the taxes collected by them to financially weaker municipalities) or “dividing taxes” (either directly, based on the respective criterion established in the dividing tax, or indirectly, where a certain percentage share of dividing taxes is transferred to the equalisation fund)—or by means of state grants.

It should be noted that various variations of these models are possible: the models of vertical equalisation and horizontal equalisation could be combined and applied together; in addition, both revenue and expenditure may be subject to equalisation, or equalisation may be carried out through taxes as well as through grants.

Alongside, it needs to be noted that even though in European states there is no single model of equalising the financial capacity of municipalities, most states that opted for the model of horizontal equalisation demand that the size of the contributions made by financially stronger municipalities be calculated on objective criteria and that upon carrying out the equalisation the differences in the financial capacity of the municipalities become reduced, however, that the financial capacity of the financially stronger municipalities should not change in substance with respect to the financially weaker municipalities.

3. In the context of the constitutional justice case at issue, it should be mentioned that, for example, under the Republic of Poland’s Act on the Revenue of Territorial Self-Government Units, the balancing part of the general grant allocated to municipalities (gmina) and counties (powiat), as well as the regional part of the general grant allocated to voivodeships, are formed from the payments made by these self-government units to the state budget, after which such payments are redistributed horizontally at the same self-government level. This Act contains a set of criteria enabling one to determine the self-government units that are under an obligation to pay the payments and the sizes thereof: the municipalities the indicator of per capita certain tax revenue of which is bigger than 150 percent of per capita average revenue of all municipalities must pay the respective payments to the state budget after which they are allocated in order to support other municipalities. The amount of the annual payment is calculated by multiplying the number of inhabitants by a certain sum depending on how much the tax revenue of a concrete municipality is bigger than per capita average tax revenue of all municipalities. The factors which are taken into consideration in calculating equalisation payments of voivodeships are analogous to those applied in order to calculate equalisation payments of municipalities, however, the legislature established different percentage indicators determining the size of the payments.

4. In the context of the constitutional justice case at issue, it should also be noted that the issues of funding municipalities, inter alia, equalising their financial capacity, have been analysed in the case-law of constitutional justice institutions of foreign states.

4.1. For instance, in its judgment (case K 14/11) of 31 January 2013, the Constitutional Tribunal of the Republic of Poland (hereinafter—the Constitutional Tribunal) emphasised that, under the provisions of the Constitution, the competence to establish redistribution of revenue between the central and local authorities is vested in the legislative power. There is no objective measure that could enable an assessment of the form of the equalisation payment system, since this is a matter of political choice.

Summing up the reasoning related to the mechanism of determining the equalisation payments, the Constitutional Tribunal noted that, from the constitutional viewpoint, this institute is permissible under certain conditions, inter alia, where the principles of determining and distributing the payments are regulated by means of laws (judgment (case K 14/11) of 31 January 2013).

In its judgment (case K 13/11) of 4 March 2014, the Constitutional Tribunal held that, in the course of carrying out the equalisation, the revenue of a territorial self-government unit may not lose its essential and encouraging significance. The purpose of the equalisation mechanism is to equalise the revenue of territorial self-government units by raising it above the average revenue. A situation where, due to financial equalisation, the revenue of voivodeships falls below the average revenue, is in conflict with the constitutional values upon which the existence of this mechanism is based, namely, with the principle of solidarity and the principle of the Republic of Poland as the common good of all citizens. If, upon applying the secondary equalisation mechanism, the level of per capita revenue falls below the average level and there is no possibility of raising it above the country’s average (because the subsidies and grants have already been distributed), the operation of the horizontal equalisation mechanism violates the interests of the members of the respective self-government community and diminishes the opportunity of funding their needs only because the needs of the members of other self-government communities are being satisfied.

The horizontal equalisation mechanism is constitutionally permissible if it implements the principle of fairness and does not exceed its extent that is necessary for implementing this principle. In order to implement the principle of fairness in a proper manner, when defining the criteria of determining which self-government units are the richest and which are the poorest, the legislature must take into consideration both the different revenue of self-government units and the needs of their expenditure with a view to reflecting the revenue and economic potential of self-government units as objectively and comprehensively as possible (judgment of (case K 13/11) 4 March 2014).

4.2. In its judgment No. 3-4-1-8-09 of 16 March 2010, the Supreme Court of Estonia held that the right and duty to decide and organise local issues can be exercised by a local authority only if it has enough money. The state is under an obligation to establish such a funding system that provides local authorities with sufficient funds for the performance of local government functions. It is up to the legislature to decide what sources the sufficient funds must come from.

The state must establish a system enabling an assessment of the existence of sufficient funding of local authorities’ functions. The local authorities would thus acquire an opportunity, in case of their insufficient funding, to apply to courts, hence implementing their right of recourse to a judicial remedy as laid down in Article 11 of the European Charter of Local Self-Government in order to secure free exercise of their powers and respect for such principles of local self-government as are enshrined in the constitution or domestic legislation (judgment No. 3-4-1-8-09 of 16 March 2010).

IV

On the compliance of Item 2 (wording of 2 December 2009) of Article 3 of the Law on the Methodology for Determining Municipal Budget Revenue with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution, as well as with the constitutional principles of a state under the rule of law and responsible governance

1. As mentioned before, the petitioners request an investigation into the compliance of, inter alia, Item 2 (wording of 2 December 2009) of Article 3 of the Law, insofar as it prescribes that the share (in percentage terms) of the PIT as specified in the Appendix to the Law is transferred to a municipal budget, with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under rule of law and responsible governance.

2. According to the petitioners, the impugned legal regulation limits the opportunity of municipalities to ensure in a discretionary and responsible manner that local public affairs be managed in an efficient and democratic manner by taking account of the competence granted to them by the Constitution and, alongside, violates the independence of municipal budgets. This legal regulation established without any reasonable grounds the shares of the PIT to be allocated to municipalities, distorted the essence of the equalisation of the financial capacity of municipalities and thus violated the constitutional principle of responsible governance; in addition, the principle of the equality of rights of the municipalities was deviated from, since the opportunities of the municipalities to receive the public services corresponding with the needs of the respective community and its contribution to the revenue received by the municipality.

3. It has been mentioned that, under the Constitution, inter alia, Articles 29, 120 and Paragraph 1 of Article 121 thereof, and the constitutional principles of a state under the rule of law and responsible governance:

    • the funds that are needed in order to ensure the fully fledged functioning of self-government and the performance of the municipal functions must be provided for in the State Budget;

  • while providing for such funds in the State Budget, the Seimas is bound by the laws that it itself has adopted, including those defining as to how the funds of the State Budget for the municipalities are calculated, under what procedure they are allocated, how tax revenue or portions of taxes established by law are forecasted for municipal budgets etc.;

  • the legislature, when pursuing the economic policy of the state, enjoys the discretion to choose the priorities in funding municipalities, as well as the ways and forms by which the state supports municipalities, however, in doing so, the legislature must heed the Constitution that gives rise to the legislature’s duty to establish the legal regulation whereby, in proportion to the requirement for funding the functions performed by the municipalities, funds for financing municipal functions would be allocated, inter alia, by transferring certain taxes (a share thereof) to municipalities, where account is taken of the resources as well as material and financial possibilities of the state and society;

  • after the legislature has imposed the personal income tax as one of the sources for fulfilling the functions of the state (municipality) and has resolved that this tax is allocated to municipalities in order to fund their activities, the duty arises for the legislature from the Constitution to establish the legal regulation by which the funds received from the personal income tax, as well as all other funds allocated for financing municipal functions would be distributed in proportion to the extent of the functions performed by the municipalities;

  • the Constitution gives rise to the legislature’s duty to establish the legal regulation whereby the funding of municipal functions should respectively be corrected (either increased or reduced) not only in the situations where the extent of municipal functions is changed, but also where the requirement for funds necessary for funding municipal functions changes due to other objective reasons, as, for instance, due to demographic or economic changes;

  • under the Constitution, the legislature, in an effort to ensure the funding required for a fully fledged functioning of self-government and the implementation of municipal functions and by taking into account the differences in the social and economic development of regions, may choose a model for equalising the financial capacity of municipalities and establish the respective mechanism for such equalisation;

  • under the Constitution, the legislature must establish a clear procedure for calculating the funds allocated to the municipalities, where such a procedure would ensure the funding required for a fully fledged functioning of self-government and for the implementation of municipal functions, and, alongside, would ensure the independence and freedom of activity of municipalities within their competence as defined by the Constitution and laws;

  • the constitutional principle of the equality of persons would be violated if certain persons or their groups were treated in a different manner, even though there are no differences of such a character and to such an extent between the said persons or their groups so that their uneven treatment could be objectively justified.

4. It has been mentioned that, by Item 2 (wording of 2 December 2009) of Article 3 of the Law, if it is interpreted in conjunction with the other provisions of the Law, the legislature has consolidated a certain mechanism for equalising the differences between the revenue of municipalities received from the PIT and the expenditure structures of municipalities; the essence of such a mechanism is the distribution of a part of the PIT in an effort to equalise per capita revenue received by municipalities from the PIT and the differences in the expenditure structures conditioned by objective, social, and other factors.

It has also been mentioned that, in order to equalise the revenue received by the municipalities from the PIT and the differences in the expenditure structure of municipalities conditioned by objective factors beyond the control of the municipalities, a certain share of the PIT (in percentage terms) of individual municipalities is assigned (where such a share remains from the amount of the share specified in the Appendix to the Law and is transferred by the local tax administrator to the account of the State Treasury).

It has also been mentioned that the shares (in percentage terms) of the PIT transferred to municipalities were established and changed in the absence of any law-established criteria on the grounds of which such shares must be calculated.

5. In assessing the compliance of the impugned legal regulation with the Constitution, it should be noted that the absence of any such criteria makes it unclear whether the financial situation of the municipalities whose share of the PIT is transferred to the account of the State Treasury in order to carry out the equalisation is indeed better, and how much better, if compared to the municipalities receiving such support from the account of the State Treasury. In addition, the legislature had failed to take account of the consequences of such equalisation, i.e., of the fact of whether the situation of the municipalities whose share of the PIT is transferred to the account of the State Treasury to perform the said equalisation would not deteriorate to the extent lower than that of the municipalities supported from the said account.

It should be held that the legislature, having established that, under Item 2 (wording of 2 December 2009) of Article 3 of the Law, the local tax administrator transfers to every municipality the share (in percentage terms) of the PIT allocated to each of them as specified in the Appendix to the Law, however, having failed to establish any clear criteria for calculating such a share, where such criteria could make possible an assessment of the changes in the municipal needs for revenue and the capabilities of certain municipalities to contribute in equalising the differences in the PIT collected by other municipalities and the differences in the structures of the expenditure performed by the latter, where such differences are determined by objective factors beyond their control, created preconditions for distorting the essence of the mechanism for the equalisation of the financial capacity of municipalities.

6. Consequently, the legal regulation consolidated in Item 2 (wording of 2 December 2009) of Article 3 of the Law, whereby the share (in percentage terms) of the PIT as specified in the Appendix to the Law is transferred to a municipal budget, in the absence of any law-established criteria on the grounds of which such a share should be calculated, may not be regarded as creating preconditions for ensuring the funding required for a fully fledged functioning of self-government and for the fulfilment of municipal functions.

7. In the light of the foregoing arguments, the conclusion should be drawn that Item 2 (wording of 2 December 2009) of Article 3 of the Law, insofar as it provides that the share (in percentage terms) of the PIT specified for every municipality in the Appendix to the Law is transferred to the respective municipal budgets in the absence of any law-established criteria on the grounds of which such a share should be calculated, is in conflict with Articles 29, 120, and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance.

8. The Constitutional Court has held on more than one occasion that, if it finds that the provisions of a law, whose compliance with the Constitution is not impugned by the petitioner, but which interfere with the relations regulated by the impugned law, are conflict with the Constitution, must state that such provisions are unconstitutional (inter alia, the Constitutional Court’s rulings of 29 November 2001, 14 January 2002, 1 July 2013, and 11 July 2014). This is also applicable to the provisions that are not impugned by the petitioner but are consolidated in the same law the compliance of whose other provisions with the Constitution is impugned by the petitioner (the Constitutional Court’s ruling of 11 July 2014). The implementation of constitutional justice implies that the legal act (part thereof) that conflicts with the Constitution must be removed from the legal system (the Constitutional Court’s ruling of 29 November 2001).

9. As mentioned before, the legislature enjoys the discretion to choose the priorities in funding municipalities, as well as the ways and forms by which the state supports municipalities, including the manner of calculating the state budget funds for municipalities and the manner of allocating such funds, however, in doing so, the legislature must heed the Constitution that gives rise to the legislature’s duty to establish the legal regulation whereby, in proportion to the requirement for funding the functions performed by the municipalities, funds for financing municipal functions would be allocated, inter alia, by transferring certain taxes (a share thereof) to municipalities, where account is taken of the resources as well as material and financial possibilities of the state and society.

It has been mentioned that, after the legislature has imposed the personal income tax as one of the sources for fulfilling the functions of the state (municipality) and has resolved that this tax is allocated to municipalities in order to fund their activities, the duty arises for the legislature from the Constitution to establish the legal regulation by which the funds received from the personal income tax, as well as all other funds allocated for financing municipal functions would be distributed in proportion to the extent of the functions performed by the municipalities.

It has also been mentioned that the duty of the legislature arises from the Constitution, inter alia, from Article 120 and Paragraph 1 of Article 121 thereof, to establish the legal regulation whereby the funding of municipal functions could be respectively amended (either increased or decreased) not only in the cases where the extent of municipal functions is changed, but also when the need for funds undergoes changes due to other objective reasons, as, for instance, demographic or economic changes.

It has also been mentioned that, under the Constitution, the legislature, in an effort to ensure the funding required for a fully fledged functioning of self-government and the fulfilment of municipal functions and by taking into account the differences in the social and economic development of regions, may choose a model for equalising the financial capacity of municipalities and establish the respective mechanism for such equalisation; in doing so, the legislature must heed the Constitution, inter alia, the constitutional principle of a state under the rule of law whereby the legal regulation laid down in laws and other legal acts must be clear, comprehensible, and coherent, and must heed the constitutional principle of responsible governance, by which the state institutions and officials must properly exercise the powers conferred on them according to the Constitution and laws.

10. It has been mentioned that, in order to equalise the revenue received by the municipalities from the PIT and the differences in the expenditure structure of municipalities conditioned by objective factors beyond their control, a certain share of the PIT (in percentage terms) of individual municipalities is assigned (where such a share remains from the amount of the share specified in the Appendix to the Law and is transferred by the local tax administrator to the account of the State Treasury) (Article 6 (wording of 10 December 2002) of the Law).

It has also been mentioned that, under the legal regulation laid down in Paragraph 3 (wording of 10 December 2002) of Article 8 of the Law, no account is taken of the demographic, social, and other indicators (affecting objective changes in the differences of the municipal expenditure structure) of the municipalities to which, under the Appendix to the Law, a share of the PIT lesser than 100 percent is assigned, and no funds are allocated to such municipalities for equalising differences in the expenditure structure.

11. It has been held in this ruling that no laws have established any criteria for calculating the shares of the PIT to be transferred to the municipalities as consolidated in the Appendix to the Law according to Item 2 (wording of 2 December 2009) of Article 3 of the Law, thus, no laws have established any criteria for determining the municipalities which, according to the Appendix to the Law, are assigned not the entire share of the PIT and whose differences in expenditure structures are not subject to equalisation. Such legal regulation has created the preconditions for unreasonably placing the said municipalities at a disadvantage in comparison with the municipalities regarding which such equalisation is performed; consequently, the municipalities are not treated in an equal manner.

In addition, under Paragraph 3 (wording of 10 December 2002) of Article 8 of the Law, it is not ensured that, upon the occurrence of changes in the demographic, social or other indicators of the municipalities whose share of the PIT is allocated for the equalisation of the differences in the PIT and expenditure structure, where such indicators exert influence on objective changes in the expenditure structure of municipalities, by taking account of the resources as well as material and financial capacity of the state and society, an adequate funding should be allocated for such municipalities so that they might be able to discharge their functions.

12. In the light of the foregoing arguments, the conclusion should be drawn that Paragraph 3 (wording of 10 December 2002) of Article 8 of the Law, insofar as it prescribes that, when calculating the funds allocated for the equalisation of differences in the expenditure structure of the municipalities, the value of the municipal demographic, social and other indicators affecting objective changes in the differences of the expenditure structure of municipalities is counted only in respect of the municipalities where the share of the PIT approved by the Appendix to this Law is equal to 100 percent, is in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution, as well as with the constitutional principles of a state under the rule of law and responsible governance.

V

On the compliance of the Appendix (wordings of 23 October 2001 and 2 December 2009) to the Law on the Methodology for Determining Municipal Budget Revenue (wording of 23 October 2001) with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance

1. As mentioned before, the petitioners also request an investigation into whether the Appendix (wordings of 23 October 2001 and 2 December 2009) to the Law (wording of 23 October 2001), insofar as it prescribed that the Vilnius City Municipality is assigned a 40-percent share of the PIT, was not in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance.

According to the petitioners, with respect to the Vilnius City Municipality, the principle of the equality of rights has been violated in an especially gross manner, since only 40-percent share of the PIT is assigned to it, while this share, if compared with the shares (in percentage terms) of the PIT assigned to the municipalities of other towns and districts, is very small.

2. It has been mentioned that the Appendix to the Law prescribed that the share of the PIT allocated to municipalities would be the following: to the Vilnius City Municipality—40 percent; to the Kaunas City Municipality—74 percent; to the Klaipėda City Municipality—64 percent; to the Palanga Town Municipality—70 percent; to the Panevėžys City Municipality—84 percent; to the Šiauliai City Municipality—96 percent; to the Ignalina District Municipality—78 percent; to the Mažeikiai District Municipality—55 percent; to other municipalities—100 percent.

It has also been mentioned that the Appendix (wording of 2 December 2009) to the Law prescribed that the share of the PIT allocated to municipalities would be the following: to the Vilnius City Municipality—40 percent; to the Kaunas City Municipality—94 percent; to the Klaipėda City Municipality—86 percent; to the Mažeikiai District Municipality—95 percent; to other municipalities—100 percent.

It has also been mentioned that the shares of the PIT assigned to municipalities were established and changed in the absence of any law-established criteria on the grounds of which such shares must be calculated.

3. It has been mention in this ruling that Item 2 (wording of 2 December 2009) of Article 3 of the Law, insofar as it provides that the share (in percentage terms) of the PIT specified for every municipality in the Appendix to the Law is transferred to the respective municipal budgets in the absence of any law-established criteria on the grounds of which such a share should be calculated, is in conflict with Articles 29, 120, and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance.

4. Having held this, on the grounds of the same arguments, it should be held that the Appendix (wordings of 23 October 2001 and 2 December 2009) to the Law was in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance.

5. As mentioned before, the Appendix (wording of 12 December 2013) to the Law prescribes that the share of the PIT allocated to municipalities is the following: to the Vilnius City Municipality—48 percent; to the Kaunas City Municipality—94 percent; to the Klaipėda City Municipality—86 percent; to other municipalities—100 percent.

The comparison of the legal regulation established in the Appendix (wording of 12 December 2013) to the Law with the one laid down in the Appendix (wordings of 23 October 2001 and 2 December 2009) to the Law makes it clear that such legal regulation has not been changed substantially from the aspect impugned by the petitioners.

6. Having held that the Appendix (wordings of 23 October 2001 and 2 December 2009) to the Law was in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance, on the grounds of the same arguments it should also be held that the Appendix (wording of 12 December 2013) to the Law is in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance.

7. In view of this fact, the conclusion should be drawn that the Appendix (wordings of 23 October 2001 and 12 December 2013) to the Law is (was) in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution as well as with the constitutional principles of a state under the rule of law and responsible governance.

VI

1. By this ruling, the Constitutional Court has ruled certain provisions of the Law which are related to the funding of the municipalities to be in conflict with the Constitution.

Under Paragraph 1 of Article 107 of the Constitution, a legal act (or part thereof) may not be applied from the day of the official publication of the decision of the Constitutional Court that the act in question (or part thereof) is in conflict with the Constitution.

2. It has been held in the jurisprudence of the Constitutional Court that, under the Constitution, the Constitutional Court, having assessed, inter alia, what legal situation might arise after a ruling of the Constitutional Court becomes effective, may establish a date of the official publication of that ruling; the Constitutional Court may postpone the official publication of its ruling if it is necessary to give the legislature time to remove the lacunae legis which would occur if the relevant ruling of the Constitutional Court were officially published immediately after it is pronounced publicly in the hearing of the Constitutional Court and if such lacunae legis constituted preconditions for basically denying certain values defended and protected by the Constitution. The said postponement of the official publication of the Constitutional Court’s ruling (inter alia, a ruling by which a certain law (or part thereof) is ruled to be in conflict with the Constitution) is a precondition stemming from the Constitution in order to avoid certain effects, unfavourable to the society and the state as well as the human rights and freedoms, which might appear if the relevant ruling of the Constitutional Court were officially published immediately after it is pronounced publicly in the hearing of the Constitutional Court and if it became effective on the same day of its official publication (inter alia, the Constitutional Court’s rulings of 19 January 2005, 23 August 2005, and 6 February 2012).

3. Under the Constitution and the Law on the Constitutional Court, after this ruling of the Constitutional Court is officially published, from the day of its official publication, the provisions of the Law which have been ruled to be in conflict with the Constitution by this ruling of the Constitutional Court may not be applied.

Therefore, if the ruling of the Constitutional Court in this case were officially published right after its public pronouncement at the Constitutional Court hearing, there would occur vagueness in the legal regulation on the funding of the municipalities due to which the allocation of funds to the municipalities could be disturbed in essence.

4. In view of this fact, this ruling of the Constitutional Court must be published officially in the Register of Legal Acts on 2 January 2016.

Conforming to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Articles 1, 53, 54, 55, and 56 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania gives the following

ruling:

1. To recognise that Item 2 (wording of 2 December 2009, Official Gazette Valstybės žinios, 2009, No. 147-6552) of Article 3 of Republic of Lithuania’s Law on the Methodology for Determining Municipal Budget Revenue (wording of 23 October 2001), insofar as it provides that the share (in percentage terms) of the PIT specified for every municipality in the Appendix to this law is transferred to the respective municipal budgets in the absence of any law-established criteria on the grounds of which such a share should be calculated, is in conflict with Articles 29, 120 and Paragraph 1 of Article 121 the Constitution of the Republic of Lithuania as well as with the constitutional principles of a state under the rule of law and responsible governance.

2. To recognise that Paragraph 3 (wording of 10 December 2002, Official Gazette Valstybės žinios, 2002, No. 123-5527) of Article 8 of the Republic of Lithuania’s Law on the Methodology for Determining Municipal Budget Revenue (wording of 23 October 2001), insofar as it prescribes that, when calculating the funds allocated for the equalisation of differences in the expenditure structure of the municipalities, the value of the municipal demographic, social and other indicators affecting objective changes in the differences of the expenditure structure of municipalities is counted only in respect of the municipalities where the share of the personal income tax approved by the Appendix to this law is equal to 100 percent, is in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution of the Republic of Lithuania, as well as the constitutional principles of a state under the rule of law and responsible governance.

3. To recognise that the Appendix (wording of 23 October 2001, Official Gazette Valstybės žinios, 2001, No. 94-3307; wording of 2 December 2009, Official Gazette Valstybės žinios, 2009, No. 147-6552; wording of 12 December 2013, Official Gazette Valstybės žinios, No. 140-7045) to the Republic of Lithuania’s Law on the Methodology for Determining Municipal Budget Revenue (wording of 23 October 2001) is (was) in conflict with Articles 29, 120 and Paragraph 1 of Article 121 of the Constitution of the Republic of Lithuania, as well as the constitutional principles of a state under the rule of law and responsible governance.

4. This ruling of the Constitutional Court must be published officially in the Register of Legal Acts on 2 January 2016.

This ruling of the Constitutional Court is final and not subject to appeal.

Justices of the Constitutional Court:                        Elvyra Baltutytė

                                                                               Vytautas Greičius

                                                                               Pranas Kuconis

                                                                               Gediminas Mesonis

                                                                               Vytas Milius

                                                                               Egidijus Šileikis

                                                                               Algirdas Taminskas

                                                                               Dainius Žalimas