Norway’s New Budget Adds Unnecessary Complexity

November 16, 2021

Norway’s new center-left government that took power on October 14 has set out its 2022 budget proposals, amending the 2022 budget proposal announced last month by the outgoing conservative government. The new budget comes with several tax cuts and a handful of tax hikes. While the new proposal cuts indirect taxes by $270 million it maintains the same level of spending as in the initial proposal.

The new government has until December to push the budget proposal through parliament with the help of the Labor Party.

The budget proposal will reduce the personal income tax for the second income tax bracket, NOK 250,000 (US $28,756) to NOK 700,000 ($80,517), by NOK 1,000 ($115) to NOK 1,700 ($195) per year. Also, workers under 30 years old who earn less than NOK 535,000 ($61,540) will receive a tax credit of up to NOK 5,170 ($595).

Additionally, since Europe is registering record spikes in energy costs, the electricity tax will be cut by 47 percent for the first three months of 2022 and by 9 percent for the rest of 2022.

On the other hand, the new government will still increase excise duties on gas and diesel, although in a smaller amount than in the previous proposal, to NOK 1.60 ($0.18) per liter of gas and NOK 1.87 ($0.22) per liter diesel. Also, an air passenger tax ranging from NOK 80 ($9.2) to NOK 214 ($24.62) will be reintroduced.

The government is planning to increase taxes on CO2 emissions that are not part of the European Union Emissions Trading System by 28 percent to NOK 2,000 ($230.05) per metric ton in 2030. The government is also looking into a series of measures to offset the additional burden on taxpayers caused by carbon pricing, one being a general travel deduction of NOK 1.65 ($0.19) per kilometer.

Raising taxes on travel on one hand and providing a travel deduction, on the other hand, adds unnecessary complexity to the tax system, creating an additional burden for both the taxpayer and the administration.

Norway is one of the few countries in the world that still has a levy on net wealth. Although the country raises only 1.1 percent of its total tax revenue from the wealth tax, the new budget proposal approves several changes. The net wealth tax of 0.85 percent on individuals’ wealth stocks exceeding NOK 1.5 million ($0.17 million) will be raised to 0.95 percent. Also, the standard deduction will be increased from NOK 1.5 million to NOK 1.6 million ($0.18 million). Additionally, the main residence whose tax base is now set at 25 percent of its market value will be raised to 50 percent for properties with a market value over NOK 10 million ($405.6). For second residences, the wealth tax rate will be applied to 95 percent of the house’s value, instead of the current 90 percent.

In order to reduce the impact of the main flaws of wealth tax, Norway’s COVID-19 economic relief plan, among other measures, postponed the wealth tax payments for individuals whose net wealth included businesses that were running losses. The increased tax rate and all the additional measures in the budget proposal have the potential to generate serious administrative and compliance challenges, exacerbating the distortions created by the wealth tax.

The proposed income tax reductions have the potential to increase disposable income for workers that can potentially raise consumption and contribute to economic growth. However, the increase of the wealth and indirect taxes is likely to step up the complexity of the tax system and create additional distortions. This would also worsen Norway’s tax competitiveness as it ranks 15th on the property tax component and 10th overall in our 2021 International Tax Competitiveness Index, one place better than in 2020.

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The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

A wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.