The problem of local fiscal autonomy in Turkey and deep differences with Europe: Taxes are weak, shares are unfair, and reform is essential

Local governments are not merely institutions that provide services in contemporary public administration; they are key actors in economic development, regional equality, and democratic transparency. However, for these actors to be effective, they must possess a strong and sustainable fiscal structure. In Turkey, the fiscal capacity of local governments is becoming increasingly inadequate in the face of the growing needs of rapidly expanding cities. The fact that municipal revenues rely heavily on central budget shares and that local tax revenues remain well below OECD and European averages limits the power of local governments to invest, plan for the long term, and provide services.

In contrast, European countries have built a much more resilient local government model with broad tax powers, diversified revenue sources, and high levels of fiscal autonomy. Comparisons made using data from the OECD, Eurostat, and the World Bank reveal that the local fiscal structure in Turkey faces serious problems not only in terms of income levels but also in structural elements; it shows that a fair and sustainable fiscal architecture that is sensitive to the real needs of cities is now an area of reform that can no longer be postponed.

STRUCTURAL FRAMEWORK OF LOCAL GOVERNMENT REVENUES IN TURKEY

In Turkey, the revenue structure of local governments has long relied heavily on the central administration. Municipalities finance the majority of their revenues through shares transferred from the general budget; the share of taxes and other own-source revenues remains quite limited. According to Court of Accounts data, the share of local tax revenues in the total has remained in the 10–12% range during the 2006–2024 period.

The narrow range of tax items collected directly by local governments makes this picture even more pronounced. Apart from property tax, environmental cleaning tax, and advertisement taxes, municipalities do not have a strong local tax instrument at their disposal. Turkey's main tax revenues—income tax, corporate tax, Special Consumption Tax (ÖTV), and VAT—are collected entirely by the central government. Therefore, the tax base is not local but is largely shaped by the center.

OECD Revenue Statistics 2023 data highlight this difference strikingly. Although Turkey's tax-to-GDP ratio rose to 23.5% in 2023, this rate is well behind the OECD average of 33.9% and the EU average of approximately 40%. The picture becomes even clearer when compared with European countries: France at 43.8%, Denmark at 43.4%, Finland at 42.4%, Italy at 42.8%, and Germany at 38.1% all possess both higher tax capacity and a more balanced center-local distribution.

These data point to three fundamental points.

First, Turkey's total tax burden is significantly below that of the OECD and the EU. However, there is an injustice in the distribution of taxes. The tax structure relies heavily on indirect taxes. While approximately two-thirds of tax revenues in recent years have consisted of taxes on spending such as ÖTV and VAT, the share of direct taxes on income and wealth has remained limited.

Second, tax increases in Turkey occur largely at the national level; while central budget revenues are increasing rapidly, the revenues of local governments are not growing to the same extent.

Third, although the tax-to-GDP ratio is high in Europe, a significant portion of it is shared with local governments, and local governments are granted a certain degree of authority to levy taxes. In Turkey, however, the majority of tax revenues are collected at the central level, and the share of local governments remains low.

According to the OECD report, Turkey increased its tax-to-GDP ratio from 20.9% in 2022 to 23.5% in 2023. However, the source of this increase is the rise in taxes on goods and services and social security contributions, and it has not created a new revenue area for local governments. Therefore, the increased tax burden has not been reflected in the fiscal capacity of municipalities.

This outlook shows that the power of local governments to make their own economic decisions and generate resources is structurally limited. While the tax economy is growing, the local fiscal economy is not growing at the same rate; this makes municipalities fragile in terms of investment financing. As a result, local governments in Turkey are condemned to a structure dependent on central budget opportunities in many areas, from infrastructure investments to social services, and from long-term urban planning to financial stability.

OPERATION AND PROBLEMS OF SHARES ALLOCATED FROM THE CENTRAL GOVERNMENT

Although Article 127 of the 1982 Constitution stipulates that local administrations should be provided with revenue sources commensurate with their duties, the current system does not fully meet this principle. Municipalities cover the majority of their revenues with shares received from the general budget; budget and cash management are largely conducted based on these transfers. Today, approximately 80% of total revenues in metropolitan municipalities and approximately 70% in other municipalities consist of shares transferred from the central government.

Law No. 5779 determines the principles for the shares to be allocated to local governments from central government tax revenues. The most decisive criterion of the system, which is based on four different share groups (metropolitan municipalities, metropolitan district municipalities, water and sewage administrations, and other municipalities), is population. In metropolitan district municipalities, almost all shares are calculated based on population; service costs, migration pressure, socio-economic differences, or geographical conditions are not taken into account. For this reason, municipalities with high fiscal burdens and those with lower service costs can receive the same level of shares.

In this method, which can be called a "share allocation system," transfers/revenues are distributed in two ways: one based on "location" and the other based on "country." In the location-based method, a certain percentage of specific taxes collected in the settlement where a particular local government unit is located is allocated to that local government unit. In the country-based method, a certain percentage of specific taxes collected throughout the country is taken into a distribution pool and distributed to local government units according to pre-determined principles.

Although there are criteria such as the number of villages or surface area for provincial special administrations, their weights are low, so they do not create a meaningful difference in distribution. This shows that the share system in Turkey operates in a structure that does not consider the real needs or cost differences of cities and deepens inequality.

Another important element of the system is debt deductions. Article 7 of Law No. 5779 allows for deductions to be made from the shares of municipalities for their debts to various public institutions. Especially for fiscally weak municipalities, these deductions significantly narrow the usable budget and weaken the capacity to produce services. Thus, the room for maneuver of local governments, which are already dependent on central resources, is further limited.

As a result, municipalities in Turkey have become institutions that "receive tax shares rather than levy taxes." This structure both weakens fiscal autonomy and leaves local governments vulnerable to economic fluctuations. Since a shrinkage in the central budget or a decrease in tax revenues directly means a decrease in municipal revenues, it becomes difficult to speak of the existence of a sustainable financing mechanism at the local level.

LEVEL OF FISCAL AUTONOMY IN LOCAL GOVERNMENTS

Fiscal autonomy is directly related to the extent to which local governments can use their power to collect taxes and determine their own revenue sources. Three main models stand out globally: broad fiscal autonomy, limited fiscal autonomy, and central dependency.

In countries that implement broad fiscal autonomy, local governments have the authority to determine the subject, tax base, rate, and other elements of the tax. This model makes it possible for local governments to both generate their own resources and make fiscal arrangements according to local needs.

Limited fiscal autonomy is a system where the authority to levy taxes remains at the center, but the authority for assessment, accrual, or collection of certain taxes is transferred to local governments. Local governments have a limited fiscal space for maneuver in this model.

In central dependency, the entire taxation process is carried out by the central state; local governments only receive shares according to determined criteria. Turkey's current fiscal architecture is closest to this model.

Today, the dependence of municipalities in Turkey on central tax revenues is quite high. Approximately 80% of total revenues in metropolitan municipalities and approximately 70% in district municipalities consist of central budget shares. These rates show that the capacity of local governments to act independently from the center in fiscal terms is extremely limited.

Although this dependency has some advantages (such as guaranteed income), it carries serious risks in terms of fiscal sustainability. Fluctuations in the Turkish economy, decreases in tax revenues, and central budget tightening directly affect municipal revenues, reducing local service capacity. Furthermore, municipalities that rely on guaranteed income may not be sufficiently willing to make efforts to increase their own revenues; this is one of the reasons why local tax capacity has not developed for years.

As a result, the level of fiscal autonomy of local governments in Turkey is quite low. The fact that the revenue structure is largely determined by the center both makes municipalities vulnerable to economic shocks and limits their power to take initiative in local development policies.

LIMITATIONS OF LOCAL TAX CAPACITY IN TURKEY

The main reason why local tax capacity in Turkey has not been able to develop for years is the centralized structure of the fiscal system. The fact that local governments do not have basic powers such as levying taxes, determining the tax base, and adjusting rates condemns municipalities to a narrow, outdated, and often unrealistic tax base that does not reflect economic reality.

This limitation is grouped under several headings:

• Centralist tax regime: In Turkey, all main tax items such as income tax, VAT, Special Consumption Tax (ÖTV), and corporate tax are collected by the central government. Local governments are left with only limited areas such as property tax, environmental cleaning tax, and advertisement taxes. This structure prevents the expansion of local fiscal resources.

• Low and outdated tax bases: The fact that property tax bases do not reflect real market values leads to municipalities not receiving a sufficient share from their most important local tax revenue. The fact that the real estate valuation system has not been updated creates serious revenue losses, especially in large cities.

• Weakness of collection capacity: Administrative capacity is insufficient in many municipalities. Deficiencies in digital infrastructure, problems with data currency, and personnel limitations keep collection rates at a low level.

• Informality and property inventory problems: Not keeping title deed, address, and user information up to date; the fact that a large number of real estates are unregistered or incompletely registered significantly narrows the tax base.

• Lack of new-generation tax instruments: Since modern urban economy tools such as accommodation tax, second home tax, or tourism density tax are not localized, large cities in particular cannot use an important revenue opportunity.

When these elements combine, they cause local tax revenues in Turkey to remain structurally low; the growth potential of the local economy is limited by the centralist tax structure. As a result, municipalities cannot diversify their revenues despite increasing costs and growing urban populations; this leaves local governments facing chronic financing insufficiency.

TAX AUTHORITY AND FISCAL STRUCTURE OF LOCAL GOVERNMENTS IN EUROPE

In European countries, local governments have a much wider fiscal space for maneuver compared to Turkey. In most countries, local governments can both manage the tax base and determine tax rates suitable for local economic conditions. This situation makes the local revenue structure strong and diversified; it makes it possible for cities to generate resources according to their own economic dynamics.

The most common local tax instrument in Europe is property tax, and in many countries, municipalities can independently determine the rates of this tax. However, the most important difference in Europe is the application of personal income tax at the local level, especially in Scandinavian countries. While municipalities in Denmark determine income tax rates directly themselves, the share of local income tax in the total reaches 60% in Sweden. This provides local governments with a strong, predictable, and sustainable revenue base.

According to OECD data, an average of 32% of local government revenues across Europe consists of taxes they collect directly. The share of transfers varies between 30–40%, and the remaining part consists of user fees, rental income, and other own-source revenues. In Turkey, there is the exact opposite picture: as I mentioned above, transfer dependency rises to 70–80% in metropolitan municipalities and 60–70% in district municipalities; the local tax rate remains at only 10–12%.

Another remarkable element of fiscal diversity in Europe is the accommodation tax. The accommodation tax, which has been applied for many years in tourism cities such as Amsterdam, Paris, Berlin, Rome, and Barcelona, provides an important resource for the protection of historical and cultural areas, the development of public transport, the management of tourism pressure, and the financing of cleaning and security services. Despite this, there is no local accommodation tax in cities where tourism is most intense in Turkey, such as Istanbul, Antalya, and Muğla; this leads to cities hosting millions of tourists missing out on an important revenue opportunity.

The second home tax, which is applied in many cities in Germany, is also one of the examples of the variety of fiscal instruments in Europe. This tax aims to ensure that people who own more than one residence contribute fairly to local infrastructure and service costs.

The difference in Europe is seen not only in revenue diversity but also in fiscal management and transparency mechanisms. The revenue-expenditure relationship can be monitored more directly, and citizens can follow the fiscal performance of local governments more closely. This strengthens fiscal discipline and accountability while increasing the responsibility for revenue generation.

In short, local governments in Europe have a much more resilient structure fiscally thanks to broad tax powers, a strong property tax system, local income taxes, and modern urban economy tools. The limited tax authority and high transfer dependency in Turkey make it difficult for local governments to develop their own fiscal capacities.

ANALYTICAL SUMMARY OF THE TURKEY–EUROPE COMPARISON

The difference in fiscal autonomy between Turkey and European countries is clearly evident in both revenue structure and fiscal authority areas. While the majority of local government revenues in Turkey rely on shares determined by the central administration, local governments in Europe have a much broader tax base and the opportunity to create their own resources.

Approximately 70–80% of the revenues of metropolitan municipalities in Turkey and 60–70% of district municipalities consist of central transfers. In contrast, transfer dependency in Europe is generally in the 30–40% range. The difference in terms of local tax revenues is even more striking: while the local tax rate in Turkey is at the 10–12% level, the European average is 32%. In Scandinavian countries, this rate goes up to the 50–60% band; in many countries, property tax and local income tax are among the main fiscal instruments of local governments.

The widespread application of modern urban economy tools such as accommodation tax, second home tax, and flexible property tax in Europe increases the revenue diversity of local governments and strengthens their fiscal resilience. In Turkey, the fact that such tools are not used at the local level causes large cities in particular to be unable to benefit from an important revenue opportunity.

There is also a serious difference in approach in the share distribution system. While shares in Turkey are largely determined by population, parameters such as service cost, socio-economic development, migration pressure, and geographical difficulties are not taken into account. In Europe, fiscal equalization mechanisms are more developed, and models aiming to balance structural differences between cities are common.

The following indicators summarize the main differences between the two systems:

These indicators clearly reveal that Turkey's local fiscal architecture is significantly far from the localized fiscal structures of Europe. The fact that the majority of taxes are collected at the center in Turkey limits the fiscal autonomy of local governments; unlike the multi-layered, flexible, and locally sensitive fiscal structure in Europe, it creates a more rigid and centralist model.

CONCLUSION: A Strong Local Fiscal Architecture is Essential for Strong Cities

Today, local governments in Turkey are operating on an increasingly weak fiscal ground in the face of the needs of growing cities due to their high dependence on the central budget and limited revenue diversity. The local tax share, which remains behind OECD and European averages, the outdated property tax system, and the unfair share distribution based on population are narrowing the financial capacity of municipalities day by day. Yet, European cities are able to both protect their fiscal autonomy and grow their cities sustainably with tools such as a strong property tax structure, local income tax, and accommodation tax.

What is needed for Turkey's cities to achieve a more resilient, competitive, and sustainable structure is now clear: A comprehensive local fiscal reform that transforms the share system into a fair structure that considers cost and development differences, expands the local tax base, and provides municipalities with modern urban economy tools. This transformation, which reduces central dependency and localizes the capacity to generate resources, will not only strengthen the budgets of municipalities but will also create a strategic gain in terms of Turkey's economic competitiveness, regional justice, and democratic standards.

In short, strong cities can only be built on a strong local fiscal architecture. This is exactly the choice that will shape Turkey's future: not municipalities with narrowed authority and limited resources, but local governments that can manage their own revenue base, are accountable, and are fiscally independent.

True development only begins at the local level; therefore, what Turkey needs is not municipalities with limited authority, but a fiscally independent and stronger local government system.