On 24 May 2023, the Croatian Government presented changes to tax legislation affecting various forms of taxation. The key changes pertain to the introduction of reliefs for calculating contributions to Pillar I of pension insurance, the abolition of surtax and autonomy of local government units (cities and municipalities) to freely define the personal income tax (PIT) rate and the increase of personal allowances in the income tax system.

In the new IPF Note Ivica Urban, Slavko Bezeredi and Vjekoslav Bratić analyse the effects of the proposed measures to the tax burden of a hypothetical employee, discuss their advantages and potential threats to autonomous definition of tax rates and suggest potential alternatives to the proposed contribution relief.

The analysis shows that the introduction of relief for the Pillar I of pension insurance helps a group of low-income people, who in the current income personal tax system could not "profit" from the increase in personal allowances and the reduction of tax rates, which was the goal of the Government of the Republic of Croatia. The authors offer recommendations on alternative measures that would also meet the set target. The first alternative would be a measure under which a tax credit would be designed within the framework of the tax system with the possibility of tax refunds that would be paid from the central government budget. Another alternative measure is a similarly designed social benefit that would be paid with a net salary, and would be administratively cheaper and simpler and more transparent than tax reliefs. These alternative measures should have twofold objectives, i.e., include the aspect of “make work pay", containing elements that motivate harder-to-employ individuals to enter and stay on the labour market.

The second part of the analysis shows that enabling the reduction of income tax rates from 20% to 15% and from 30% to 25%, which will be independently and autonomously decided by cities and municipalities, opens the possibility of further reduction of the tax burden that will benefit those with above-average salaries. This in itself is not bad, but leaders of cities and municipalities should also be aware of a possible significant drop in personal income tax revenue, which represents the main source of funding for public services in local government units. Therefore, in the following relatively short period, it is up to the local authorities to make a strategic decision on which direction to go and how to adapt to the new circumstances.