Canceling 2026 income tax would cost more than reducing VAT on food, says ministry
Scrapping next year's planned income tax increase would increase the state budget deficit by between €250 million and €290 million per year, data from the Ministry of Finance shows. Canceling the car tax or introducing a VAT exemption for food would cost the state less.
Prime Minister Kristen Michal (Reform) and Minister of Finance Jürgen Ligi (Reform) said on Thursday that the government could consider canceling or reducing an income tax rise next year if tax revenues turn out to be better than expected.
The move comes after more than 93,000 people signed a petition to lower VAT on food products from 24 percent to 10 percent. This is the first sign the coalition is taking the initiative seriously.
The Ministry of Finance has now published figures estimating how much the deficit would grow if the income tax increase were canceled, a reduced VAT rate for food were introduced, or the car tax were canceled.
Canceling the income tax rate increase planned for next year would, in the years 2026–2029, cost the state between €250 million and €290 million. The figure assumes that both the personal and corporate income tax rate increases would be canceled, the ministry specified.
Getting rid of the car tax or introducing a reduced VAT rate for food would have a somewhat smaller impact on the budget.
According to the current forecast, the car tax will bring in about €236 million in 2025. The government plans to reduce this by nearly €100 million through exemptions and additional road maintenance funding, the ministry noted.
If food were subject to a 13 percent VAT rate, revenues next year would total €290 million, which is €245 million less than with the 24 percent rate.
The ministry added that the cost of introducing a reduced rate could also be smaller if applied only to certain product groups, as is done in Latvia.
In Latvia, the reduced rate applies, according to a fixed list, to fresh fruit and vegetables, but not to dried, salted, or frozen products, nor to exotic products.
Under Estonia's VAT Act, food includes unprocessed and processed foodstuffs such as milk, meat, vegetables, bread and grains, beverages (excluding alcohol), and basic necessities.
The income tax will rise by two percentage points to 22 percent for individuals in 2026.
On July 1, VAT in Estonia rose to 24 percent. By midday Friday, a petition launched in late June to reduce the VAT rate on food had gathered more than 93,900 signatures. Car tax was also introduced this year.
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Editor: Valner Väino, Helen Wright
