Territorial Review Copenhagen - Region Hovedstaden

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3.3.1 Fiscal equalisation
Like many OECD countries that are strongly decentralised, Denmark
has an equalisation scheme that compensates municipalities with a low tax
base and high costs relative to the average municipality in Denmark. A
municipality whose estimated expenditure is larger than its estimated tax
receipts receives an equalisation subsidy, which is 58% of the difference
between the expenditure and the estimated tax revenues. Conversely, if the
receipts are higher than estimated expenditures, 58% of the difference has to
be paid in equalisation contribution. Funding for the equalisation system,
above the contribution stipulated, is provided by the central government.
The estimation of revenues and expenditures is carried out by the Ministry
of Welfare.
The structural reform of 2007 had an impact on the equalisation scheme,
raising the equalisation rate of the national scheme from 45% to 58%, while
simultaneously lowering the rate of the Copenhagen scheme from 40% to
27%. The reform also introduced a new equalisation scheme concerning
municipal revenue from tax on limited liability companies. If revenue is
higher than the national average, the relevant municipality has to pay 50%
of the difference between the municipality‘s revenue per inhabitant and the
national average to the municipalities where the opposite is the case. An
additional rule was introduced with the purpose of increasing equalisation if
the economic growth in Copenhagen outpaces the rest of the country. If the
tax base per inhabitant growth rate in Copenhagen is higher than the rest of
the country, the equalisation percentage in the general equalisation scheme
is increased by one percentage point, calculated from the base year of
2007In the opposite case, equalisation is not reduced. The general
equalisation cannot increase to more than 68%.
3.3.2 Sub-national fiscal autonomy
Although Denmark has one of the highest degrees of sub-central
government autonomy over tax rates in theory, fiscal autonomy is limited in
practice. With the tax freeze for all government tiers implemented in 2002
by the national government, there is an explicit limit on tax autonomy that
means that the average local tax rate is not allowed to increase. This policy
was made even stricter in 2005. In addition, implicit sanctions on subcentral
governments serve to restrain increases in tax rates. Apart from the
tax rate increases that were needed to finance the new functions of
municipalities after the structural reform in 2007, the raises in tax rates in
Denmark have been relatively moderate: only from 2003 to 2004 was there a
significant increase in tax rates (see Figure 3.9). The average tax rate of