The difficulty in understanding Helsinki s position

Transcription

1 The difficulty in understanding Helsinki s position Heikki Helin The special nature of cities usually receives little attention, and in national policy, major cities are often seen in opposition to other areas. In Finland, for example, Helsinki s position and development is hampered by a deeply rooted although ungrounded conception of rich metropolitan areas that grow at the expense of other municipalities. This has given rise to the idea in Helsinki to study and compare more closely the special features of major cities. By international standards, Helsinki is Finland s only major city. It has roughly ten per cent of the country s population, but its significance in many crucial matters of the nation is often much greater. For example, Helsinki has 16 per cent of the country s jobs, and consequently any major upswing or recession in Helsinki will soon have effects nationwide. Helsinki has most of the state authorities central offices and most company headquarters. This is probably why Helsinki is often seen as a rich city elsewhere in Finland. With its higher income level and great accumulation of corporate tax revenue, Helsinki has been envied by most, and there has been little understanding for Helsinki s problems. Helsinki s municipal tax rate has been lower than average among Finnish municipalities but, obviously, municipal tax is just one of many different costs of living. The general level of costs is clearly higher in the Helsinki Region than in Finland at large. Housing in particular is expensive: rents are at least one-quarter higher than in Finland as a whole. With an average income, a Helsinki citizen pays the equivalent of an additional 5 to 10 per cent extra tax for a rented flat than other Finns on average (Helin, ed. Keskinen et al. 2002). The economy of the City of Helsinki has developed in a stable manner. Whilst the city has been able to predict and cope with fluctuations in tax revenue due to economic highs and lows, it has had no means to be prepared for sudden and surprising decisions made by the state. High costs in big cities The balance of the municipal economy depends on revenue and expenditure. In Finland, where the constitution grants municipalities autonomy including the right to levy municipal tax, the state has significantly influenced the revenue of municipalities by means of collecting corporate tax nationwide and allocating it to municipalities according to certain criteria. The state, i.e. the legislator, which has formulated these criteria itself, has also forced municipalities to produce certain kinds of services without allocating sufficient funds for the purpose. 27

2 State allocations for Helsinki s operational economy , euros per inhabitant Euros/inhabitant Helsinki Vaasa Kotka Turku Vantaa Espoo Average Jyväskylä Tampere Lahti Hämeenlinna Lappeenranta Kuopio Mikkeli Oulu Pori Joensuu 2002 Operational costs for the social and health services of 16 Finnish cities in 2001, euros per inhabitant Euros/inhabitant Among the biggest cities in Finland, Helsinki has the most expensive municipal public services (Helin 2002). There are several reasons for this, among which the higher level of salaries and premise rents are important. In Helsinki, advantages of scale (more clients per service provider) have turned into additional costs within some services. High public service costs in Helsinki are explained by the same factors that, according to Ernst Jonsson (1989), lie behind similar differences of costs between major cities and other municipalities in Sweden: service production in big cities has certain features of mass production. Mass production, of course, may give certain advantages, but at a certain stage these advantages become additional costs. With electricity, water and other technological services, costs per unit usually decrease with increasing volume. But in education, health care and other similar services the same rule will not apply, and administrative costs grow rapidly. According to Jonsson, the high costs per capita for public services in Stockholm, Gothenburg and Malmö compared with Swedish municipalities at large are related to the high level of salaries, rents and costs in the big cities, the greater proportion of immigrants and the disadvantages of a big city. Major cities have a greater proportion of divorced people, singles and foreigners. This fact is usually linked with various social problems that we see in Helsinki, too, and that partly explain the high costs. Compared with the other Scandinavian metropolises, costs are not higher in Helsinki. There are many problems with comparisons of public service costs in municipalities. An apparent paradox seems to be that the more developed a municipality s cost accounting system, the higher the costs per unit. The costs say nothing about the quality of the service or the needs for service. In several service fronts, Helsinki offers high-quality service and the city provides services to neighbouring municipalities, too. 28

3 The state allocation system does not account for higher service costs The Finnish state allocation system consists of 1) allocations for special purposes and 2) a division of nationwide aggregate tax revenue. The division also called equalisation of tax revenue efficiently cuts the tax revenue of those municipalities that exceed the national average. Thus, in 2000, 2001 and 2002 Helsinki received no equalising tax revenue funds but paid to the others, instead. The uncertainty of the municipalities around Helsinki has been increased by the fear of even greater tax equalisation rates. The present state allocation system is based on a system introduced in The significance of tax equalisation grew in 2002, when the 15% limit was cancelled. Under this scheme, no more than 15% of a municipality s calculated tax revenue could be included in the equalisation. The rules for the state allocations for special purposes contain no such criteria that recognise the special problems caused by Helsinki s position as a big city. And indeed, it would be difficult to find such criteria. Also, increased criteria would probably lead to a more complex system than today, and their effects would not be significant. Therefore, the emphasis has been on revenue equalisation. The problem for Helsinki with the Finnish state allocation system is that it cuts Helsinki s higher income without, however, taking into account that service costs are higher in Helsinki due to higher income levels. For example, salaries in health care and child day care are clearly higher in Helsinki than the national average for the simple reason that otherwise people in Helsinki could not afford to take these jobs. State allocations for special purposes do not account for these differences in cost level, either. Jonsson has pondered how tax revenue equalisation between municipalities could be made fairer. He suggests a sort of net income equalisation that would take higher salaries and real estate costs into account (Jonsson 2002, 2003). Helsinki foots the bill From the state s point of view, the Finnish municipal sector s economy has increasingly turned into a zero sum game. By taking from some municipalities and giving to others, the state has been able to reduce its own role in supporting the activities of municipalities. Through its various decisions, the state has weakened the aggregate municipal economy by 4.3 billion euros. In Finland, the tax revenue of municipalities is equalised according to a procedure where each municipality is guaranteed a tax revenue that equals 90 per cent of the average tax revenue of all municipalities. Municipalities whose tax revenue falls short of the 90 per cent limit receive an equalisation that amounts to the difference between the limit and their tax revenue. If the tax revenue of a municipality exceeds the 90 per cent limit, the state allocations to this municipality are reduced by 40 per cent of the amount of the excess. In 2002, 80 municipalities exceeded the 90 per cent limit, and paid an aggregate equalisation of 875 million euros. Helsinki s share was 410 million euros, i.e. 47 per cent. This corresponds to the yielding of 4 tax per cent units in Helsinki. Together with its neighbours Espoo and Vantaa, Helsinki accounted for 72 per cent of the equalisation. The state has taken over tax revenue from municipalities In solemn speeches we are often reminded that the right of municipalities to levy municipal tax is a cornerstone of municipal autonomy. Yet, the independence of taxation is crumbling bit by bit and so is autonomy. High tax revenues in the Helsinki Metropolitan Area are due to its higher income level than the 29

4 national average. Another reason why Helsinki has had high tax revenue is corporate taxes. Since 1993, of course, this revenue has consisted of what is left after corporate tax equalisation. And the proportion going to municipalities has been used for tax equalisation and partly therefore it has shrunk. In 1993, municipalities received 44.8 per cent of corporate tax revenue, but in 2003 only per cent. This has implied difficulties particularly for those municipalities who used to have large corporate tax revenues. At a certain point, Helsinki accounted for as much as a quarter of the share of Finnish corporate tax that went to municipalities. Helsinki s problem is its size. When the share of aggregate corporate tax that municipalities receive is reduced or when tax revenue equalisation is raised, Helsinki contributes with funds that can repair the economy of tens, even hundreds of smaller municipalities. According to Ministry of Finance calculations, the municipalities share of the aggregate corporate tax revenue should be cancelled and replaced by state allocations. Such a measure would hardly fail to influence the policy and activities of municipalities. To date, municipalities have endeavoured to attract business, too, but from then on they would most likely start competing for taxpayers. We can only speculate what municipal decisions taken a few years ago would have been like if it had been known that the allocation of corporate tax revenue may be changed. It has been customary to locate business enterprise, too, in the administrative, economic and cultural centre of the municipality. Corporate tax may also be seen as a kind of compensation for the higher level of cost due to the position that big cities have as nodes. Helsinki s difficult position In the 1990s, the stable operational environment of Finnish municipalities became a turmoil. Reforms succeeded each other, and their consequences were not always evaluated properly. Often new reforms were being planned before their predecessors had even been put into practice, let alone evaluated. Municipalities would have preferred a stable and predictable operational environment just like any organisation would. Due to the unexpected measures of the state, it has been impossible to plan further ahead than one year or so. Nobody has been able to predict what the state might decide on tax revenue and obligations, because the state authorities have been busy preparing a comprehensive reform of the state s funds allocation system. Not many are ready to protect Helsinki s interests when the issue is to decide about cuts in corporate tax and changes in the tax revenue equalisation system. If we really were to cancel the municipalities share of aggregate corporate tax, it would not be possible to create a system that would account for the level of corporate tax revenue that municipalities are enjoying today. If the equalisation of tax revenue were to be increased further and if the state did not participate in the costs incurred, Helsinki and the rest of the Metropolitan Area would have to foot the bill again. Members of parliament elected from other parts of the country sometimes pursue the interests of their region very perseveringly, and politicians whether elected in Helsinki or elsewhere usually do not seem to have the time or energy to take an interest in the City of Helsinki s economic problems. And there are politicians in Helsinki that have a different view than the city s authorities of what decisions should be made in order to promote the city s interest. Helsinki s position is difficult in the Association of Finnish Local and Regional Authorities, too. The state has partly managed to withdraw from its responsibili- 30

5 ties by leaving the distribution and equalisation of tax revenue increasingly to the municipalities themselves. Differences of opinion between municipalities are settled within the Association of Finnish Local and Regional Authorities, and the state government does not have to get involved in disagreements between municipalities. Helsinki and the Metropolitan Area are a minority in the association, and in the zero sum game between municipalities it is easy to move resources to others. For Finland s national economy as a whole, too, there is reason to study what happens if development of the country s most efficient region is hampered by draining its financial resources. References: Helin Heikki, Turhaan kadehdittu Helsingin rikkaus. Julkaisussa Helsinki pohjoinen metropoli. Helsingin kaupungin tietokeskus (toim. Vesa Keskinen Martti Tuovinen Mari Vaattovaara) Helin Heikki, Kallis Helsinki. Suurten kaupunkien palvelukustannukset vuonna Helsingin kaupungin tietokeskuksen tutkimuksia 2002:1. Jonsson Ernst, Varför har storstäder särskilt höga kommunala kostnader? IKE, Institutet för kommunal ekonomi. December Jonsson Ernst, Skatteutjämning mellan kommuner. Hur kan sen göras mer rättvis? IKE, Stockholms universitet. Företagsekonomiska institutionen. Stockholm, December Jonsson Ernst, Så blir det kommunala utjämningssystemet mer rättvist. Kommunal ekonomi. nr 1/2003, ss