Municipalities and regions will get more money. What does this mean for their budgets – and for all of us?

More money for municipalities and regions. What changes from 2026?

From 1 January 2026, the ratio according to which the state redistributes part of the tax revenue between municipalities, regions and the state budget will change. Specifically, the share for municipalities will increase from the current 24.16% to 25.93% and for counties from 9.45% to 10.23%. In other words, for every hundred crowns the state collects in so-called shared taxes (e.g. VAT or personal income tax), local governments will get a bigger “piece of the pie”.

But the change is not just about numbers. The methodology by which the money is distributed among the municipalities is also changing. Until now, the number of inhabitants or the size of the cadastre had a big influence. Now, more emphasis will be placed on the number of pupils and students. Municipalities that invest in schools and education can therefore make a profit.

Why schools? Because education is one of the areas where the state has been shifting more responsibility to municipalities in recent years – be it for non-teaching staff, teaching aids or maintenance of school buildings. The increased tax share thus serves as a form of compensation.

At first glance, it may appear that these are merely accounting transfers. But in reality, this change can have a major impact on the development of specific communities – for example, better infrastructure, repaired schools or better public services. And this is what citizens most often see as the visible result of their municipality’s management.

Why is the state giving municipalities a raise when it is saving money itself?

At first glance, it may seem paradoxical – the state has a budget deficit, but it gives municipalities and regions a raise. But the reason is not generosity, but the need to compensate for what the state is gradually passing on to them. Typically in the field of education or social services.

Municipalities and counties are increasingly responsible, for example, for funding non-teaching staff in schools or for purchasing teaching aids. It is the increase in their share of shared taxes that is supposed to offset this increased burden.

At the same time, it is important to remember that while municipalities have long run surpluses, this does not mean that they are “sitting on money” without a plan. Many of these surpluses are earmarked for specific investments – often planned several years in advance and tied to subsidies.

An example is Prague, which has a reserve in its accounts for the construction of the metro. Such funds are not free money, but earmarked investment resources.

Another reason why municipalities manage cautiously is the uncertainty of the legal environment – for example, around public procurement. If the rules are not predictable, it is hard to plan.

In short: a surplus municipal budget does not mean that money is not needed. Often, on the contrary, it is carefully set aside where it will be spent in the future.

How many local governments really spend “unnecessarily”?

The notion that municipalities and regions are sitting on mountains of money and investing little comes up a lot in debates. But the reality is more complex. Most local governments manage responsibly and in accordance with the law. In fact, their budgets are subject to strict rules – for example, so-called fiscal responsibility.

This says that the debt of a municipality or region must not exceed 60% of its average income over the last four years. If they exceed that limit, they must adopt a so-called “recovery plan” and reduce the debt by at least 5% of the excess amount within a year. If a municipality or county fails to comply with the plan, the Ministry of Finance can restrict their access to certain subsidies. However, such a situation tends to be the exception – most municipalities manage with a reserve and only rarely run into problems.

Moreover, the management of municipalities is public and supervised. Every budget must be approved, published and audited after the year-end – either by the regional authority or by the auditor. Publication also applies to the final accounts or any changes to the budget during the year.

And why do municipalities sometimes not spend money even when they have it? The reason is not laziness, but often obstacles – lengthy permit procedures, lack of experts, complicated subsidy conditions. The money is “lying around” not because there is no interest in it, but because the system is complex and uncertain.

How are municipal revenues determined? And what is the incentive share?

The tax budgeting system allocates different shares of several types of taxes to municipalities. One of the most interesting elements is the so-called 1.5% incentive share from the personal income tax on employment. This is based on the place of work, not on the employee’s permanent residence. This encourages municipalities to support local employment and create conditions that attract entrepreneurs and employees. At the same time, it distributes revenues more fairly where economic activity actually occurs.

But the system is not without its pitfalls. A typical example is the income tax on self-employed workers, which is allocated according to the entrepreneur’s domicile, not where he or she actually does business. This can favour predominantly residential municipalities, which do not bear the costs of doing business – for example, transport infrastructure or services.

The employee incentive component, in turn, may induce tax competition between municipalities. They then compete for employers to formally ‘register’ with them, even though they do not actually provide any extra services to local citizens. The system thus does not always match how people and businesses use public infrastructure.

From a legal perspective, the law on tax budgeting is stable and clearly defines who is entitled to what revenue. However, its weakness remains low flexibility – it is slow to respond to demographic and economic changes. At the same time, it is quite complex for ordinary citizens, which can complicate public scrutiny of municipal and regional management.

As a citizen, can I influence what my municipality spends on?

Yes, and it’s not just a theory. Municipal budgets are not closed documents for insiders – on the contrary, the law obliges municipalities to publish the draft budget, its approved form and the final accounts. No later than 15 days before the discussion, the draft must be available to the public, either on the official board or (more often) on the municipality’s website.

But that is not all. Citizens have the right to comment on the draft budget – either in writing or orally at the council meeting. This is an opportunity to highlight local residents’ needs, suggest changes or ask why money is being spent in a certain way.

Some municipalities are going even further and introducing ‘participatory budgeting’. People can propose specific projects themselves – such as repairing a playground, planting trees or new benches. The proposals are voted on and the winning projects are actually implemented.

Being able to influence public spending is one of the most concrete ways to get involved in public life. It is also a way to make sure that the municipality uses its resources efficiently and in line with the needs of its residents.

It is not useless to be interested in the municipal budget – it is one of the most direct ways to influence the quality of life where you actually live.

Summary

The changes to the budgeting of taxes that will come into force from 2026 are not just a technical adjustment to the numbers. They will be reflected in the day-to-day operations of municipalities and counties – in how much money they have for schools, roads, social services or cultural events. The increase in local governments’ share of shared taxes is not a gift, but compensation for the increasing responsibility the state is placing on them. Although it may seem that municipalities hoard money and invest little, the reality is different: investment is hampered by bureaucracy, a complex system of subsidies and fear of an uncertain future. The tax redistribution system has its logical foundations but also weaknesses – for example, in the way it takes into account the actual location of economic activity. The good news is that the municipal budget is not a secret. Every citizen can comment on it, see how public money is spent, and in some cases even directly decide on specific projects. The budget is thus not just a document for officials, but a tool that – if handled well – can significantly improve the quality of life in the place where we live.