Austria’s Budget Comes with Tax Cuts and Carbon Levies

The 2022 Austrian budget proposal advances the tax reform plan agreed to by 2020’s coalition government formed by the Austrian People’s Party and the Greens.

While Europe is registering record spikes in energy costs, Austria is pushing ahead with an agenda for carbon emissions reduction with a phased-in carbon levy. At the same time, the budget includes a gradual taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reduction to lower the tax burden on workers and businesses.

The budget proposal will reduce the personal income tax rate for the second tax bracketA 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. from the current 35 percent to 30 percent as of July 2022. In 2021, the personal income tax rate on the first tax bracket (€11,000-€18,000) was also lowered from 25 percent to 20 percent. However, another reduction from 42 percent to 40 percent for the third income tax bracket (€31,000-€60,000) was pushed back one year, until mid-2023. For high-income earners, Austria is not planning any tax cuts even though the top marginal income tax rate, at 55 percent, is the third highest among OECD countries and only slightly behind Denmark (55.9 percent) and France (55.4 percent).

Additionally, health insurance contributions will be cut by 1.7 percentage points for low- and middle-income earners, the family bonus will be raised from €1,500 to €2,000 per child each year, as of July 2022, and the supplementary child tax creditA 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. for low earners will reach €450, from the current €250.

These proposed reductions in the personal income tax and social security contributions are a step in the right direction as Austria has the third highest tax burden on labor among OECD countries. However, if the tax brackets, family bonuses, and child tax credits are not adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , these tax cuts will be eroded over time.

On the corporate side, the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. will be cut from 25 percent to 23 percent starting in 2024. This is a smaller rate cut than in the initial tax reform plan, which would have lowered the corporate income tax rate to 21 percent by 2024. The government is also considering increasing the tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. threshold on profits up to €30,000 from 13 percent to 15 percent.

In order to compensate for these tax reliefs and to comply with the European Union’s green transition agenda, Austria will start to tax CO₂ emissions at €30 (US $35) per ton from July 2022, and gradually increase it to €55 ($64) per ton by 2025. The government is also looking into a series of measures to offset the additional burden on taxpayers caused by carbon pricing, one being an investment allowance of up to €350 million ($405.6 million) to improve businesses’ energy efficiency and help them become more environmentally friendly.

While transitioning from income taxation to carbon taxation might have a positive impact on employment, relying too heavily on carbon taxation might undermine economic recovery and have a long-term effect on economic growth. At a time when energy costs are at one of their highest levels, the Austrian Institute of Economic Research (WIFO) estimates that the carbon levy might increase prices on a liter (0.26 gallons) of fuel by €0.10 ($0.12) while electricity prices might go up by €0.07($0.08) per kWh. To be able to set a very low carbon levy, a broad base approach is necessary in order to cover as many carbon emissions as possible.

Austria has one of the highest tax burdens on labor, but also the sixth highest tax-to-GDP ratio at 42.4 percent in the OECD. Therefore, any tax reform that Austria plans to implement should reduce the tax-to-GDP ratio or be revenue-neutral. The proposed reductions in social security contributions, and personal and corporate income tax, have the potential to create jobs and greater economic growth. However, the delay in implementing these tax cuts will also postpone growth and labor market impacts intended to be achieved with these tax reforms.

Austria should not shy from lowering the corporate income tax rate sooner or even implementing a more ambitious tax reform to improve its tax competitiveness and contribute to greater economic growth.

Launch 2021 International Tax Competitiveness Index

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