budget 99

One of the key elements of the government’s economic policies is to reduce labour taxes. The government’s intentions and efforts to achieve this goal are welcome and supported by proposals presented hereby.

The basic task is to make the economy competitive. It could be achieved first of all through increasing the share and efficiency of human labour. Reducing the currently high taxes on labour could encourage this effort.

Unemployment benefit plus related government allowances, and minimum wages are nearly equal; to have a properly functioning system, the difference between government aids and earned wages needs to be created. This can be implemented only by a reduction of gross labour costs, namely, by finding other sources to make up for the "lost" revenues from the social security taxes and the personal income tax.

Labour taxes are required to go down as a whole. It is important, therefore, that positive government measures, such as eliminating unnecessary tax-exemptions, do not offset the beneficial impacts of the initiatives to reduce taxes on labour. The government has only made an indecisive step into that direction, while it has frozen wages in the public sector, increasing social tensions.

The public sector is required to grow and become more powerful by EU standards; by freezing wages the government prevents the public sector from growing any further. The necessary sources of increasing wages could also come from a service-oriented approach. (The costs of customs clearance and services can be charged on importers, for instance.)

High social security taxes have an adverse impact on employment and competitiveness. Having recognised it, the government made steps to reduce the taxes on the same grounds that our proposals have been based on since 1992, i.e. it realised that lower social security taxes might mean lower rates of unemployment.

The more workforce enters the labour market, the less dependants are financed by active earners.

Laws and regulations on the personal income tax should be changed so that inflation and the number of active earners are taken into consideration and the average per capita personal income tax would drop in real terms. Additional measures to increase tax allowances depending on the number of children or other dependants in a family have been initiated by the government in the 1999 state budget. Further increase of the family allowance, for instance, is needed and it is feasible (see Chapter 4.2 for details).

A resolution by the Constitution Court in Germany declares all costs of bringing up and educating children exempt from taxes. It may be a model that Hungary should consider as well.

It is of crucial importance to raise the taxes imposed on activities and products that pose severe damage to the health and the environment, use up non-renewable natural resources and have close links with the black economy.

An environment-oriented tax reform could improve the general state of the environment, serve more rational economic goals and contribute to social justice. Furthermore, it is required by many documents of the EU, such as the Amsterdam Treaty of 1997. The OECD Council issued a guideline (C(72)128) as early as in 1972, which was followed by several documents and reports in later years. The guideline says "Natural resources are scarce as a rule, thus their use in production and consumption lead to their deterioration. Unless the costs of that damage are incorporated into the prices, the market will not be able to reflect the scarcity of the resources either in a specific country or internationally. That is why measures are required to reduce pollution and allocate the resources in a more efficient manner by implementing prices that reflect the relative scarcity of the resources (depending on the quality and/or quantity of the resource used), and by economic production accordingly… The polluter pays principle is an effective means of encouraging more rational use of scarce natural resources and avoiding distortions in investment practices and the international trade. Therefore, it is a principle to apply when it comes to allocation of costs to prevent and control pollution. The polluter must pay for all the costs of restoring the environment to a reasonable state to be stipulated by officials and authorities. Or, in other words, the prices of goods and services the production of which causes environmental damage must cover the costs of rehabilitating the environment."

Prices of motorcar transport fail to reflect all the costs involved, for instance, the costs of environmental and health hazards it produces. External costs need to be incorporated in the prices by all means; both economic rational and social justice, as well as Hungary’s commitment to European standards require it. (The Green Paper titled Towards Fair and Efficient Pricing in Transport; 1995 and the White Paper titled Fair Payment for Infrastructure Use; 1998 strongly manifest EU policies about transport. The documents undoubtedly reveal that a significant share of transportation costs are not borne by the actual users of the transport in each member country of the EU, and those costs should eventually be incorporated into the prices of transport.)

A resolution (CEMT/CS(98)5/FINAL) made by the Conference of European Ministers of Transport (CEMT) in Copenhagen in May 1998 states that a large part of the losses and hazards generated by transportation are still not paid by the users of transportation services, and it calls for an overall restructuring of the prices by incorporating external costs into them. Restructuring can only be done through imposing increased taxes and charges in a way that will not add to the volume of taxes in aggregate. The resolution also underlines the responsibility of the governments in the individual member states to give sufficient information to the public making them able to accept and support the incorporation of external costs into the prices of transportation.

Our proposals are also based on the above notion, that is the costs of the damage that have been borne by the entire society (including, of course, the users) must be reflected in the prices of the goods or services where those hazards are generated.

Environmental damage caused by transport in Hungary is summarised in Table 19. (Values in proportion to the GDP come from a report compiled by Dr Károly Lotz, the Minister of Transport, Telecommunications and Water Management in 1994 and presented to the Environment Committee of the Parliament; HUF values have been calculated from projected GDP figures for 1998 and purchasing power data published by the World Bank and agreed by the OECD and the EU.)

Impact	Costs % of GDP		Costs at Current Prices billion HUF						Purchasing-Power-Based Costs billion HUF
	Costs % of GDP		Total		*Road*		*Rail*		Total		*Road*		*Rail*
	Min	Max	Min	Max	Min	Max	Min	Max	Min	Max	Min	Max	Min	Max
Accidents	1.5	2.0	140	257	171	228	22	29	224	299	199	265	26	34
Air Pollution
- local	1.0	1.3	94	167	122	159	6	8	150	194	143	185	7	9
- other (from remote areas)	0.3	0.5	28	64	34	56	5	8	45	75	39	65	6	9
Noise, Vibration	0.8	1.0	75	128	83	104	20	24	120	150	97	121	23	28
Time Lost	2.0	3.0	187	385	222	332	35	53	299	449	258	387	41	61
Total:	5.6	7.8	524	1002	632	879	88	122	838	1167	736	1024	102	143

Table 19 illustrates that environment hazards of transport are three or four times bigger than the revenues from taxes (consumer tax, vehicle tax charged by local governments, etc.) levied on motor vehicles only. Other types of taxes that are imposed on every product and service, such as VAT, are not supposed to be taken into consideration here since they are designed to pay for the overhead costs of the society as a whole, and are shared by all industries in proportion to their performance.

The figures in the table are far from covering all the external costs of transport. The loss and damage because of climate change due to greenhouse gas emissions or occupying space for transportation purposes have not been considered while calculating the figures, although the costs of removing those hazards are not paid by the users of transport only. Furthermore, there are hazards that indirectly arise from transport, that is, they are produced by activities without which motor vehicles would not able to exist at all (road construction, motorcar manufacturing, crude oil production – just to mention a few). The Ministry of Environment Protection in Austria has found that their impact, however, should not be disregarded since those indirectly involved industries consume 0.7 times the energy that transportation does. Assuming that environmental damage is proportional to energy consumption, the figures in the table should be multiplied by 1.7 to make them realistic.

Other calculations find that actual environmental hazards and costs are lower than those in the table. However, even those "underestimates" support the idea that environmental and other damage caused by transportation well exceed the amount of state revenues from this sector.

The Institute for Transport Services in Hungary has published a study in which they have found that total losses from road accidents in 1994 amounted to HUF 55.2 billion, which is around HUF 117 billion at 1998 prices.

Objections are raised that prices of fuels cannot be increased any further because wages in Hungary lag behind those in Western Europe. By accepting those objections, we would agree that the lives and health of Hungarians are worth less than those of EU citizens. Taxes on fuels need to be increased so that other taxes could be reduced, leaving room for wage increase that enables people to survive or to better their living conditions.

Increasing fuel prices generate inflation, however, only temporarily and slightly. The advantages of the increase may offset inflation in the second half of 1999. Prices of fuels represent 3% in the prices of Hungarian products as a rule; therefore, the average price level is not expected to increase much. (Prices of fuels represent only 8% even in taxi rates. Supposing that prices of fuels grow by 50%, these rates would go up by 6%. However, we estimate that overall moderation of road traffic would by far offset the negative impacts of that increase. Less traffic would improve the fuel efficiency of cabs by reducing the time spent idling motors in traffic jams, and more people would travel by cab.)

Higher taxes on fuels would discourage fuel consumption. Lower fuel consumption helps protect the environment, lower the number of accidents, boost public and railway transport and improve the balance of trade.

Road transport companies are wrong when they argue that domestic transport companies are already overburdened with taxes. The following support just the opposite:

Another argument against our proposals is that higher taxes would "put an end to road transportation" and bring about significant losses for the economy. The number of motor vehicles has seen an upsurge over recent years. (And, the trend has been speeded up in the past months: sales of motorcars and fuel consumption have increased by an annual 30 and 9% respectively in 1998.) However, domestic and foreign studies provide the evidence that the growing number of motor vehicles does not necessarily mean that economic performance improves accordingly. Or just the other way round; unjustified growth of motor vehicle transport drains resources from other areas that could be better ground for economic development. Figure 5 compares the GDP and the number of motorcars over the past twenty years. It is interesting to see how little impact the number of motor vehicles has on economic growth.

International statistics also find that the number of motorcars is unreasonably large as compared to the state of the economy in Hungary. Figure 6 shows the correlation between the per capita GDP and the number of motorcars per 1,000 inhabitants.

Unlike transport companies, we think that the "real end" of transportation comes if taxes remain the same as today. First, environmental and health hazards from transport would increase (partly they have already increased) to an extent that disables further economic development as well as threaten the normal functioning of the society as a whole. It is important to remember that damage is often increasing exponentially when transport is growing. Second, the current infrastructure is less and less sufficient to carry an ever-increasing number of vehicles. The infrastructure, however, is very hard to be improved for economic reasons (lack of or insufficient resources) and for geographical ones (city and town structures are not much flexible).

Another reason for increasing taxes on vehicles (or at least adjusting them by the rate of inflation) is that it could open up ways to reduce other types of taxes, such as on labour, which has been a declared aim of the government itself.

Prices of fuels in Hungary are less than those in the countries of the EU. (See Table 22.) Wages should not be the exclusive sources of social security; higher taxes (excise duties and VAT) on fuels could in part cover the funds since fuels are responsible for various health problems.

An amendment of Act CIII of 1997 on Excise Duties and Special Rules of Trading Goods Subject to Excise Duties has brought about changes in excise duties of fuels as of January 1, 1999: duties of petrol and diesel fuel have been increased by 13 and 11% respectively. Despite the nominal increase (which is a giant step after years of negligence of the issue), the increase of excise duties is still below the 14.5% rate of inflation in 1998.

Tables 20 and 21 illustrate that consumer taxes, and subsequently the prices of fuels increased less than average rate of inflation in each year. The government, this way, was granting allowances to industries involved in environmentally damaging activities and consumption of goods by those industries. As a result, the balance of trade began to deteriorate, economic restructuring became less achievable, and long-lasting effects of austerity measures emerged.

Customs duties on energy supplies imported from Russia were cut by 5% in July 1998. The government’s losses from this source go up to an annual HUF 15 billion or so. At the same time, world prices of energy are moving down, which saves an annual HUF 120 billion for Hungary. These two factors open up the opportunity to increase fuel taxes without significantly affecting inflation.

An increase of excise duties lower than the rate of inflation is against the Constitution and other relevant legislation, for it promotes activities damaging our health and the environment and it also fails to meet the guidelines of joining the EU.

Our proposal is to increase excise duties on petrol by 15% in 1999; and adjust the prices of fuels to those in Austria in further years at official exchange rates. It could enable Hungary to meet EU policies and commitments taken at the CEMT.

Excise duties on diesel fuel should reach the level of duties of petrol. There are no rational reasons why diesel fuel duties should remain lower than the duties on petrol. Rationality would rather justify the opposite.

Uniform excise duties on diesel fuel and petrol are yet to be introduced; expected political and economic consequences prevented the government to introduce them in 1999. However, the government missed the opportunity to move the duties closer by increasing diesel fuel duties at a 2-percentage point higher rate than duties on petrol. Uniform rates could be achieved gradually, by increasing diesel fuel duties at a slightly higher rate than petrol duties in future years.

The European Union has adopted the principle of adjusting the duties on diesel oil to that of petrol in a recently issued draft of a directive. Diesel fuel duties have been raised in Britain to exceed petrol duties. The draft discusses specific due dates and percentages of introducing adjusted duties.

The issue of adjusting the rates of duties on diesel fuel to that of petrol has become pressing since research found that emission gases from diesel engines posed more health and environmental hazards than those from petrol-operated engines. (The World Health Organisation does not set limit values for ambient air quality in terms of certain substances in diesel emission gases because they have not found any concentration of those substances below which harmful effects to human health could be. Another reason of adjusting the rates is that diesel fuel is mostly used by lorries and heavy trucks that damage the roads to a much higher extent than cars do.

Transport companies can reclaim the VAT content of their invoices on diesel fuel, which is another incentive to use diesel fuel. It is not that VAT refund needs to be abolished since it can be reclaimed for all kinds of products used in manufacturing or service industries and it is common practice in the EU as well. What is important to note is that VAT on fuels is generally higher in Hungary than in EU countries (it is 20% in Austria, for instance), therefore, there is more to reclaim. We do not propose that VAT should be reduced – rather, it is presented as an argument in favour of increasing excise duties on diesel fuel.

Excise duties introduced in 1998 include taxes paid into the Road Fund and environmental taxes (expressed in percentages of the duties). Road Fund taxes amounted to 26.32% of excise duties on fuels in the first six months of 1998. The Road Fund tax is then adjusted every six months to reflect changes of the consumer price of fuels weighted by the quantity of different types of fuels sold in Hungary in the previous six months. Environmental tax accounts for 3% of the excise duties. Both taxes vary with the type of the fuel, which discriminates one fuel against the other. It is especially sad today when both taxes are significantly lower for diesel oil than for petrol, and lower than taxes paid earlier when the percentage of the tax did not vary with the type of the fuel.

The proposed increase of excise duties would not affect agriculture for the entire amount of the duties is refunded in this sector.

Extra revenues from fuel taxes would enable Hungary to access additional funds from the EU. (The more funds the country can generate itself, the more funds open up from EU sources.)

In summary, excise duties on diesel fuel should be increased by at least 17% as of 1 January 1999. As far as the following years are concerned, the duties should be adjusted so that the price of the fuel in Hungary matches that in Austria. It is a good means of adapting the policies used in the EU as well as meeting the obligations taken at the CEMT.

If and when the prices of fuel is adjusted to those in Austria, state revenues could increase by an annual HUF 126 billion (from consumer taxes and their VAT content) – assuming an unchanged consumption of fuel. (See Table 22.) But even if consumption drops by 20% (which is not likely to happen), state revenues could still increase by HUF 100 billion. (It is more possible that the growth of consumption observed in the previous years would stop.) The government itself could make the necessary measures to make sure that extra revenues are collected by eliminating illegal trade of fuels and imposing taxes on legally imported but not taxable ways of purchasing fuels.

Fuel Consumption in Hungary at German and Austrian Prices
(at January 1999 prices)

The government loses tens of billions of forints a year because of the smuggling of fuels. Additionally, emission gases of those fuels pollute the air and cause environmental damage in Hungary. Our proposal, as an initial measure, could reduce the losses by imposing excise duties and VAT on fuels (petrol or diesel fuel) based on the capacity of the fuel tank of the motorcars that cross the border more than once a day. To achieve this, the law on customs and tariffs needs to be modified (see Appendix 2 for details). Furthermore, currently binding legal regulations should be enforced not allowing lorries and trucks to carry more than 200 litres of fuel free from customs duties. International agreements contrary to this should be cancelled. Besides its direct effects, enforcing those regulations could put Hungarian transport companies into a more favourable competitive position.

It would also be beneficial if Hungarian leaders encouraged their counterparts in the region to introduce fuel prices that meet the standards and requirements in the EU. Also, they should make the EU consider fuel prices before making decisions on aid or beneficial treatment provided to a country. A country that keeps fuel prices depressed, and this way encourages pollution and smuggling, should not be entitled to any form of aid or benefits.

Fuel turism must be stopped. To that end, all motor vehicles coming from countries where domestic prices of fuels are at least 10% lower than those in Austria should be imposed with a tax according to the capacity of the vehicle’s fuel tank. This measure will probably be welcome and appreciated in the EU as well because smuggling from the East to the West have severe impacts (damage to the environment, increasing crime rates, etc.) on countries that are directly concerned, primarily Austria and Germany.

Act LXXXII of 1991 says that motor vehicle taxes are meant to "allocate taxes deriving from motor vehicle use in a more reasonable and fair manner, increase revenues of local governments as well as provide funds for maintaining and improving the roads". We agree with the concept, however, motor vehicle taxes are yet to meet the objectives described in the law, because:

One of the most pressing issues is to get the owners to pay the taxes. It is unacceptable for economic, environmental and ethical reasons that around one third of the motorcar owners in Hungary can escape paying motor vehicle taxes without any sanctions or consequences. The state and the local governments lose several billions of forints from this source. Local governments lack additional resources to be more efficient in collecting the taxes, so other ways and means need to be elaborated to improve the ratio. It is worth considering that APEH (the Internal Revenues Office in Hungary) could collect motor vehicle taxes and channel a given portion of revenues back to local governments.

The rate of motor vehicle taxes did not change between 1996 and 1998; whereas inflation went up by 61% in aggregate.

Motor vehicles damage the environment not only when they are "on the move" but also when they occupy space when they park. Their cleaning and maintenance produce polluting substances, not to mention the adverse impacts of relating industries and the required infrastructure. Therefore, taxes should not only be levied on variable costs of transport (such as fuel) but also on fixed costs (e.g. vehicles).

Revenues and funds to cover the fixed costs of transport (including the majority of costs of maintaining and improving the infrastructure) are significantly less than needed. More funds are required to maintain the nation-wide road network of 30,000 kilometres, and the local roads of 100,000 kilometres, managed by local governments, also need much more financial support.

Motor vehicles registered outside Hungary cause damage to the environment and use the infrastructure financed from public funds in Hungary just like their Hungarian counterparts do. The negative impacts are multiplied when foreign motorists flow into the country in large numbers in peak seasons (early and late summer, during weekends, etc.).

Lorries and trucks damage and destroy the roads and other structures to a much greater extent than cars do. One unit of damage is proportionate to the fifth power of the axle load, therefore, one heavy truck causes the same amount of damage to the roads as one hundred thousand personal cars. Lorries and trucks, therefore, should pay taxes progressively.

Lorries and trucks registered outside Hungary must urgently pay more reasonable taxes. The tax was set in 1991 (HUF 3.00 per ton-kilometres), and since then no adjustment has been made for inflation. Furthermore, nearly 90% of lorries and trucks crossing the Hungarian borders pay no taxes under the stipulations of bilateral agreements with their countries of origin. At the same time, they damage the environment, the roads and human health. A study compiled by the European Federation for Transport and Environment has found that lorries and trucks taking part in international transport cause damage worth HUF 100 billion in Hungary alone, which is left unpaid.

Studies prepared in Hungary and in other countries (such as EU’s Green Paper titled Towards Fair and Efficient Pricing in Transport) have found that trucks – especially heavy trucks – fail to pay for the damage caused by them. To cover at least a part of the costs involved, a tax raise is needed.

Additional revenues of nearly HUF 30 billion can be expected from higher taxes if and when motor vehicle taxes are raised and collected more efficiently.

Travel allowance was increased to a daily USD 25 in international road freight and passenger transports. The allowance is cost deductible, and as such, not subject to any taxes (either social security, or income taxes). In 1998, this way taxes of HUF 5,500 (calculated at the average exchange rate) were not paid a day, which may go up to HUF 900,000 in a year per person. Supposing that Hungarians working in the road transport sector cross the border of the country 800,000 times a year and stay abroad for three days on average, the state budget lost around HUF 6 billion a year. This has several consequences.

Hungarian laws allow the use of cars to be charged to the expenses of the company, which encourages motorists not to pay taxes and use their cars as much as possible. To increase tax revenues, make transport more efficient and protect our environment, we propose that the car use should be made a non-expense item for companies. There could be exceptions, such as vehicles listed in §5 of Act LXXXII of 1991 about Motor Vehicle Taxes, and taxis. (Before granting those exceptions, though, it should be verified that those who are entitled to exceptional treatment use the allowance for the specified purpose.)

Some say that some portion of the costs could be expensed, for instance, 7 litres per kilometre or 80% of the total costs of fuels. We don’t agree with those proposals because motorists would find the easy way out and, let’s say, mark more kilometres on paper than actually covered.

The law on company car taxes has been modified. Legislators backed their decision as follows: "Company cars are granted for managers and owners of businesses as a fringe benefit. Statistical data illustrate that 75 to 95% of managers are in fact granted with that benefit. The actual value may vary between HUF 100,000 and 1 million, depending on the car’s value and the extent of personal use. Taxes (such as the corporate tax and the withholding tax, or the personal income tax) are normally paid by the grantor of the vehicle. However, the larger the income involved, the less taxes are paid proportionally, given the tax rates stipulated in the current rules of taxation." We strongly agree with this assessment as well as with the fact that 1999 taxes on company cars were increased at a significantly higher rate than that of the inflation.

But even those higher tax rates fail to prevent companies from granting cars to their managers. The higher the vehicle’s value, the more economical it is to run it by the company. Using the highest tax rate, HUF 252,000 are due in monthly instalments of HUF 21,000 in 1999. After charging healthcare fees, taxes total 252,000 + 63,000, i.e. HUF 315,000 a year. Using the maximum income represented by the motorcar, i.e. HUF 1 million, and the highest income tax rate, we will find that tax worth HUF 85,000 is not collected by the state (HUF 400,000 – HUF 315,000). Not to mention other charges and duties (such as the social security tax) that are not paid at all. On aggregate, the state loses HUF 500,000 on each car per year. Therefore, we propose that taxes on company cars be raised by 50%.

A further possibility is that company cars are made a non-expense item at all. Obviously, a measure like that would hit actual company use as well, but pollution and damage caused by cars are significant enough to allow such rigour. This measure could also serve the actual company use, because companies would be discouraged to use their cars all the time, so traffic conditions could get better, people could reach their destinations more easily and the number of pollution-related diseases could drop. The latter one is of crucial importance also for those travelling by car every day since the concentration of pollutants inside the car is much higher than measured in public transport vehicles or on the sidewalks.

The proposed increase of company car taxes could bring another HUF 20 billion of revenues.

From 1998 consumer tax on LPG (liquefied petroleum gas) is only imposed when used as engine fuel these days. Since alternative products such as light fuel oil or other liquid fuels are taxed (not only when used as engine fuel), under Act LVII of 1996 on Unfair Market Practices and Restricted Competition, a tax on LPG also needs to be levied.

Nearly 250 thousand tons of LPG are used annually in Hungary. Once the consumer tax is introduced, taxes worth HUF 20 billion (including VAT) are expected to be paid on 200 thousand tons of LPG (HUF 93.75 for a kilogram of the fuel), assuming a 20% drop in consumption. Of the 20 billion, HUF 6 billion should be refunded (3 billion straight to households that need compensation, and another 3 billion for energy efficiency, but strictly for the purposes of households and public institutions.) The remainder HUF 14 billion need to be transferred to social security funds to lessen taxes. One reason for implementing that measure is the same as for imposing a tax on light fuel oil, i.e. it is the only way to collect consumer tax on LPG used as motor fuel. The other reason is that with a tax imposed on light fuel oil, LPG has acquired a de facto monopoly in the market, which should be abolished under the law on fair competition.

Consumer tax increases on fuels will have an evident but less serious than expected effect on consumer prices of food and consumer goods. Measures, however, to reduce social security taxes and compensate households will not only offset the unfavourable impacts seen in the price increase, but will also create additional consumption capacities. At the same time, the national economy will become more efficient and capable of generating more revenues. Thus, implementation of our proposals will favour employees.

Elaboration of compensation schemes takes time; the proposal, therefore, cannot be implemented before 2000.

Table 23 illustrates the growth of imports of vehicles, thus the growth of pollution they cause in 1998.

The above figures expressed in USD are actually higher by 2% because USD was revalued by 2% against the ECU, and the vehicles and the parts are normally imported from countries where accounts are settled in ECU. Imports of parts to be assembled in Hungary are also substantial, particularly by the Suzuki plant.

Prices of cars are relatively low if we consider the relatively large number of cars in Hungary. Figure 6 above discusses the correlation between the per capita GDP and the number of motorcars per 1,000 inhabitants. The current level of GDP would allow 80 motorcars per 1,000 inhabitants against the actual figure of 230. By doubling consumer taxes of cars, the rate could be made more reasonable, and the state could collect HUF 15 billion a year.

As the fleet of motorcars increases, unused and neglected ones, or "wrecks", are more and more common to see in parking lots, residential areas, forsaken places, or even in the woods or fields. We estimate that at least 130,000 cars are scrapped every year in Hungary. Local governments, and indirectly (or even directly) the state spends more and more money each year because of this problem.

ERECO, a company dealing in waste management and environmental protection in Eastern Europe, has looked into the subject. They have found that recovering and recycling usable parts of those vehicles could make profits once collection and transport of the cars is taken care of. A logical solution of the problem is to demand payments of taxes and liability insurance fees from the last owner of the motorcar until he proves that the vehicle has ended up at a licensed vehicle dismantler.

To avoid that owners leave their cars in the depths of the woods or a lake saying the car has been stolen, the state could bear the costs of sending the cars into the vehicle dismantlers. Imposing higher vehicle taxes could pay for the extra costs involved.

Our proposal of waiving direct state subsidies for the Air Traffic and Airport Control Office was approved by the previous government and enacted by the legislation. Direct support, therefore, has not been granted to air companies since 1998. However, indirect support remains. This is especially unfortunate because air travel is the most polluting means of transport; and environmental costs are not reflected in the prices. The practice of granting substantial allowances (such as waiving consumer taxes on fuel for airplanes) is not unique in Hungary – it is done all over the world. It is a covert aid, which is unreasonable for economic and unfair for social reasons. Hungary, situated in the middle of the European continent, attracts an ever-increasing number of flights with subsequent pollution of the environment. Further taxes could compensate at least a part of the damage done. (Hungary saw a dramatic rise in the number of aeroplanes crossing its air space. In 1990, it was 67,500, whereas by 1994 it went up to 323,000. Ferihegy Airport received 20,000 planes in 1990, and nearly 32,000 in 1997.) Our effort to introduce higher taxes on air travel is not alone; green movements and research institutes all over the world are demanding and working out measures to introduce taxes.

Higher air tolls are one of the means of compelling air companies to pay for the external costs of air travel. Air tolls in Hungary are extremely low in relation to other countries listed in Table 24. This is unacceptable. The tolls in Austria or even Germany could be realistic for Hungary as well. We understand that increasing the tolls requires time and effort because Hungary has signed an international accord, called EUROCONTROL, which regulate the tolls in member countries. Still, the government should do its utmost to adjust the tolls to an extent that is acceptable by EUROCONTROL and reasonable for environmental considerations. If this is not manageable, the government should find other means or taxes conforming to the EU regulations to increase budget revenues from air travel.

If and when tolls are increased to the level in Austria, foreign exchange revenues could grow by USD 40 million (HUF 8 billion), improving the status of the state budget and the balance of payments.

Air space is a natural resource, so it should be treated. Charges and taxes (such as noise pollution fees, air load fees, etc.) need to be introduced soon. There are airports in some countries that charge noise pollution fees on aeroplanes that exceed a certain noise level.

Duty free shops at airports violate the rules of fair market conduct, discriminate against other means of transport and drive sales of products such as alcoholic beverages and tobacco. Furthermore, it is a "haven" for smugglers. The European Union has adopted regulations to ban duty free shops. So should Hungary. There is no economic reason to support their existence, what is more, duty free shops pose unfair competition to tax-paying retailers.

Safety is a key issue in air travel. Therefore, measures are required that only allow the airlines to enter Hungary that meet the safety requirements and travel with skilled crews. Besides its obvious benefits, this would save the Hungarian Airlines from unqualified competitors, and leave more room for Hungarian labour force.

Air travel is the most polluting means of transport. Granting support of any kind (being state or local) is entirely unreasonable and unfair. Thus, state subsidies for reconstruction and refurbishment of airports should not be considered any longer.

Hungary spent HUF 1,000 billion on energy in 1996. It equals nearly 15% of the GDP (HUF 6,650 billion) in 1996. Using the same ratio calculation, the amount spent on energy will be around HUF 1,700 billion in 1999. The energy sector represents around USD 3 billion in the trade deficit directly and indirectly, which is nearly 30% of the value of all exports (excluding free zones). Table 25 shows energy consumption and sources of energy.

Real prices of industrial use of energy (large users) have declined since November 1990 (see Table 26). Price rises since 1 December 1995 have basically kept pace with the rate of inflation and devaluation. Therefore, polluting and energy-intensive activities are still in a relatively advantageous position.

Description	1989		1990		1991		1992		1993		1994		1995		1996		1997 estimate		1998 estimate
	PJ	Unit	PJ	Unit	PJ	Unit	PJ	Unit	PJ	Unit	PJ	Unit	PJ	Unit	PJ	Unit	PJ	Unit	PJ	Unit
Domestic Production
Coal	219.8	20325	188.1	17830	178.8	17135	151.6	15831	132.9	14616	128.1	14111	130.1	14588	134.6	15190	138.1	15589
Crude Oil	80.7	1966	78.5	1974	75.5	1893	72.6	1825	67.8	1709	64.6	1631	68.4	1668	60.6	1477	55.8	1360
Gasoline	20.0	470	16.1	384	15.5	370	16.1	382	15.9	379	15.5	380	16.1	393	18	438	15.9	380
Natural Gas net	199.2	6058	159.6	4874	161.2	4974	151.3	4753	162.9	5042	157.2	4851	158.6	4886	150.8	4668	140.7	4365
Liquefied Gas	11.0	235	10.2	218	9.9	213	10.2	216	10.0	214	10.4	221	11.3	241	9.6	204	10.5	226
Water Energy	1.6	158	1.8	178	1.9	194	1.6	158	1.7	166	1.6	161	1.6	164	2.1	207	2.2	216
Nuclear Energy	138.9	13889	137.3	13731	137.3	13726	139.6	13964	138.0	13796	140.5	14049	140.3	14026	141.8	14180	139.7	13968
Firewood a)	13.8		11.7		13.4		13.3		13.7		14.0		27.5		19.5		20.7
Other							7.5		10.0		11.6		0		0		0
Total	685.0		603.3		593.5		563.8		552.9		543.5		553.9		537		523.6		481.2
Imports
Coal and Derivatives	99.7	3700	65.2	2929	90.6	4215	48.3	2185	51.7	2246	52.2	2055	43.5	1782	45.9	1860	37.8	1591	29.2	1230
Crude Oil	258.0	6300	263.1	6418	216.7	5284	233.8	5702	247.0	6026	226.5	5524	240.6	5869	215.0	5243	234.6	5722	276.3	6738
Crude Oil Derivatives	61.0	1500	67.9	1624	31.1	747	48.2	1160	74.9	1807	90.0	2171	69.6	1685	64.5	1575	64.2	1567	63.7	1555
Natural Gas	198.0	6000	217.3	6404	208.1	6121	172.2	5065	199.6	5871	189.1	5562	231.6	6812	304.2	8946	274.7	8078	299.7	8813
Electricity balance	111.0	11100	111.2	11147	73.6	7362	34.7	3476	24.7	2474	20.3	2034	24.1	2405	22.0	2197	19.6	2150	8.4	923
Total	727.7		724.7		620.1		537.2		597.9		578.1		609.4		651.6		630.9		677.3
Total Sources	1412.7		1328.0		1213.6		1101.0		1150.8		1121.6		1163.3		1188.6		1154.5		1158.5
minus Exports	85.3		70.8		47.1		58.7		74.1		91.4		87.6		80.2		78.3		68.5
Change in Stocks	11.1		13.0		-13.1		-14.8		18.3		-12.4		8.6		27.9		23.2		49.0
Domestic Use	1316.3		1244.2		1179.6		1057.1		1058.4		1042.6		1067.1		1080.5		1053.0		1041.0

*no change in price from 1991 a) included in "Other" Energy Sources from 1995 on

Description

Unit

1990

1991

1992

1993

1995

1996

1997

1998

1999

1 Jan

8 Jan.

1 Aug

1 Nov

1 Feb

1 June

1 Oct

1 Aug

1 Nov

1 Jan

1 Sep

1 Mar

1 Jan

1 Apr

1 July

1 Oct

1 Jan

1 July

1 Jan

Gas

Large Industrial User

– fee by performance

USD/MJ/h

1.9826

2.4869

4.4332

4.5670

3.5740

4.1000

2.8054

3.0345

2.7320

2.7916

2.3938

2.4035

2.1282

1.9916

1.8871

1.8463

1.8870

1.7729

1.7777

– fee by consumption

USD/GJ

1.8547

2.3425

2.3116

4.2734

3.7455

3.5714

2.6779

2.9839

2.4330

2.5838

2.3040

2.6363

2.7527

2.6725

2.8656

2.8000

2.8600

2.6134

2.6205

General Use

USD/GJ

3.5176

3.5297

3.4832

6.1981

5.4325

5.0000

3.9531

4.5012

3.6701

3.4511

3.0820

3.3689

3.4803

3.3704

3.5860

3.4886

3.5627

3.2840

3.2930

*Domestic/Household User

USD/GJ

1.9187

1.9253

2.3749

2.4466

2.1444

3.2857

2.9329

3.3506

2.7320

3.6589

3.2690

3.8757

4.0745

3.9548

4.1183

4.0445

4.0934

3.8260

3.8364

Electricity

0.0468

0.0526

0.0560

0.0827

0.0725

0.0724

0.0647

0.0656

0.0535

0.0550

0.0500

0.0541

0.0598

0.0580

0.0575

0.0581

0.0588

0.0594

0.0595

Large Industrial User

USD/kWh

0.0435

0.0509

0.0526

0.0775

0.0679

0.0606

0.0614

0.0501

0.0498

0.0487

0.0522

0.0576

0.0559

0.0553

0.0559

0.0565

0.0571

0.0572

Domestic/Household User

USD/kWh

0.0243

0.0244

0.0293

0.0302

0.0370

0.0330

0.0460

0.0400

0.0577

0.0527

0.0579

0.0640

0.0618

0.0615

0.0623

0.0630

0.0636

0.0689

day < 600 kWh/year

USD/kWh

0.0323

0.0324

0.0388

0.0400

0.0529

0.0472

0.0468

0.0381

0.0587

0.0524

0.0616

0.0679

0.0658

0.0651

0.0658

0.0663

0.0675

0.0774

600-3600 kWh/year

USD/kWh

0.0323

0.0324

0.0388

0.0400

0.0529

0.0472

0.0670

0.0546

0.0768

0.0688

0.0733

0.0812

0.0789

0.0780

0.0791

0.0801

0.0808

0.0875

> 3600 kWh/year

USD/kWh

0.0323

0.0324

0.0388

0.0400

0.0529

0.0472

0.0670

0.0773

0.0949

0.0845

0.0849

0.0940

0.0908

0.0903

0.0923

0.0934

0.0932

0.0935

night < 2400 kWh/year

USD/kWh

0.0144

0.0206

0.0212

0.0272

0.0271

0.0242

0.0240

0.0196

0.0316

0.0284

0.0322

0.0358

0.0346

0.0344

0.0347

0.0349

0.0354

0.0396

2400-12000 kWh/year

USD/kWh

0.0144

0.0206

0.0212

0.0272

0.0271

0.0242

0.0341

0.0278

0.0361

0.0322

0.0342

0.0376

0.0363

0.0360

0.0367

0.0373

0.0377

0.0405

>12000 kWh/year

USD/kWh

0.0144

0.0206

0.0212

0.0272

0.0271

0.0242

0.0341

0.0361

0.0407

0.0359

0.0363

0.0400

0.0386

0.0382

0.0388

0.0393

0.0386

0.0414

* Natural Gas for Domestic Use

USD/M3

0.0652

0.0655

0.0807

0.0832

0.0729

0.1117

0.0997

0.1139

0.0929

0.1244

0.1111

0.1318

0.1385

0.1345

0.1400

0.1375

0.1392

0.1301

0.1304

Exchange Rate

HUF/USD

62.54

62.33

63.16

61.31

69.95

70.00

78.42

79.09

97.00

110.69

133.68

146.04

164.93

176.24

186.00

196.07

203.50

217.72

217.13

Exports of highly energy-intensive products tend to pay off most, which can be spotted in export volumes of raw-material-intensive products.

The large share of energy-intensive and material-intensive products in Hungarian exports show how out-of-date and ageing the economic structure of Hungary is. At the same time, labour-intensive products represent a relatively small share in exports. (In essence, energy prices are back to the levels of the COMECON era.)

Consumers of energy do not pay for the bulk of the harm they cause and the costs of removing that harm. Energy prices today fail to represent real costs involved in the sector. Both domestic and industrial prices of energy are far less than those in EU countries, which themselves are lower than the real costs.

The external costs may vary with the type of energy and the technology used for production (see Table 27), therefore energy taxes and environmental load fees (see Chapter 2.3 for details) should differ accordingly

The government’s policy to keep prices low (lower than real costs and the prices in EU countries) is misleading consumers. It makes them think that prices are realistic, and can be sustained in the long run, which is not feasible. Therefore, additional taxes need to be imposed on energy paid by both industrial and domestic consumers. At the same time a compensation scheme should be elaborated and implemented to support those who are unable to pay higher prices (see Chapter 4.7.2).

The national energy strategy should not be based, by any political reason, on energy prices that are lower than real production and related costs. Inaccurate data lead to the miscalculation of costs, therefore, wrong conclusions and decisions are made.

Purchase Price of Fuels
and Involved External Costs
at 1998 prices, million HUF/PJ

*by a study (KTM 1234/K) from Péter Kaderják: Economic Scope of Integrated Energy and Environment Policy
**not including nuclear energy and electric energy imports

There is a strong inter-relationship between the reduction of labour costs and the increase of industrial prices of energy, which we propose. These measures would drive the structure of exports toward modernisation, whereas the competitive advantage of Hungary (i.e. available human resources and their improving competitiveness) would be enforced through economic regulation. The multiplier effect also works in trade, because net results expressed in foreign currency of more efficient, labour-intensive products are positive, moreover, are significantly higher than revenues from energy and material-intensive products, several of which generate negative results.

The tax increase would generate inflation only in part and temporarily. On the one hand the expenditures on energy would fall as a consequence of energy efficiency. On the other hand better use of labour as well as the improved economic structure would help control inflation since both increased efficiency and significantly reduced social expenses due to the multiplier effect and resulting higher rates of employment work against inflation. Instead of energy, goods with a high value added would be used. Also, better use of labour reduces current unemployment rates as well as the allowances and subsidies ultimately charged on the society. At the same time, new entrants in the labour market reduce per capita social costs. Furthermore, a reduction in energy consumption would improve the general state of the environment and help meet requirements set in international agreements.

Prices of natural gas and electricity in Hungary are lower than in EU countries. Table 28 illustrates that the price of natural gas is nearly three times higher in Austria than in Hungary; and the same applies to electricity, which is discussed in Tables 29-32.

Comparison of End User Prices of Electricity in Selected European Countries
Domestic Use
Unit price of 1 kWh, in national currencies, as of 1 January 1998

Consumption Category:		A		B2		C2		D		E1		F1		F2
Consumption in kWh/year:		600		1700		3500		7500		13000		20000		20000		VAT		Other
of which at night rate kWh/year:						1300		2500		5000		8000		15000		%		Taxes
Country	Currency and Unit
Austria	1/100 ATS		213.60		203.50		173.60		176.40		176.80		178.60		143.30		20.0		YES
Belgium	BEF		8.50		7.70		5.92		5.40		5.12		4.96		3.44		21.0		YES
Belgium (social tariff)	BEF		6.02		6.02												21.0		YES
France	1/100 FRF		113.62		96.50		83.12		80.38		75.76		76.04		66.05		20.6		YES
Eastern Germany	1/100 DEM		46.92		34.64		28.86		26.40						14.61		15.0		NO
Hungary	HUF		15.12		17.15		13.89		15.14		15.28		15.47		11.07		12.0		NO
Netherlands PNEM	1/100 NLG		33.12		25.98		24.31		24.38		23.12		22.64		17.84		17.5		YES
Poland - Silezia	1/100 PLZ		26.45		25.10		19.84		21.16		19.84		19.84		15.87		22.0		NO
Slovak Republic	1/100 SKK		174.00		123.00		98.00		89.00		150.00		143.00		52.00		6.0		NO

Source: UNIPEDE: Prices of Electricity as at 1 January 1998, Tariff Network of Experts

Comparison of End User Prices of Electricity in Selected European Countries
Industrial Use
Unit price of 1 kWh, in national currencies, as of 1 January 1998

Consumption Category:		A	B2	C2	D2	E1	F1	F2
Consumption in MWh/year:		160	1250	4000	15000	16000	50000	70000	VAT	Other
Contracted Amount (kW):		100	500	1000	2500	4000	10000	10000	%	Taxes
Time Required (h):		1600	2500	4000	6000	4000	5000	7000
Country	Currency and Unit
Austria	1/100 ATS	160.40	130.40	102.60	87.30	100.10	86.00	76.70	20.0	10*/kwh
Belgium	BEF	4.75	3.58	2.96	2.32	2.76	2.04	1.75	21.0	0.00
France	1/100 FRF	55.80	46.31	39.45	34.09	39.45	31.27	28.11	20.6	0.00
Eastern Germany	1/100 DEM	25.78	21.10	16.99	14.22	16.47	14.97	13.38	15.0	0.00
Hungary	HUF	15.50	12.06	10.35	9.40	10.35	9.49	8.85	12.0	0.00
Netherlands PNEM	1/100 NLG	17.82	13.92	11.72	10.46	11.70	10.82	10.04	17.5	0.00
Poland - Silezia	1/100 PLZ	30.52	17.11	14.61	12.21	14.61	12.21	9.70	22.0	0.00
Slovak Republic	1/100 SKK	370.00	270.00	185.00	153.00	169.00	151.00	130.00	6.0	0.00

Source: UNIPEDE: Prices of Electricity as at 1 January 1998, Tariff Network of Experts

Comparison of End User Prices of Electricity in Selected European Countries
Domestic Use
Unit price of 1 kWh, in USD, as of 1 January 1998

Consumption Category:		A		B2		C2		D		E1		F1		F2
Consumption in kWh/year:		600		1700		3500		7500		13000		20000		20000		VAT		Other
of which at night rate kWh/year:						1300		2500		5000		8000		15000		%		Taxes
Country	Currency and Unit
Austria	1/100 ATS		0.1697		0.1616		0.1379		0.1401		0.1404		0.1419		0.1138		20.0		YES
Belgium	BEF		0.2302		0.2086		0.1603		0.1463		0.1387		0.1343		0.0932		21.0		YES
Belgium (social tariff)	BEF		0.1631		0.1631		0.0000		0.0000		0.0000		0.0000		0.0000		21.0		YES
France	1/100 FRF		0.1897		0.1612		0.1388		0.1342		0.1265		0.1270		0.1103		20.6		YES
Eastern Germany	1/100 DEM		0.2621		0.1935		0.1612		0.1475		0.0000		0.0000		0.0816		15.0		NO
Hungary	HUF		0.0734		0.0833		0.0674		0.0735		0.0742		0.0751		0.0537		12.0		NO
Netherlands PNEM	1/100 NLG		0.1642		0.1288		0.1205		0.1209		0.1146		0.1122		0.0884		17.5		YES
Poland - Silezia	1/100 PLZ		0.0744		0.0706		0.0558		0.0595		0.0558		0.0558		0.0446		22.0		NO
Slovak Republic	1/100 SKK		0.0494		0.0349		0.0278		0.0253		0.0426		0.0406		0.0148		6.0		NO

Source: UNIPEDE: Prices of Electricity as at 1 January 1998, Tariff Network of Experts

Comparison of End User Prices of Electricity in Selected European Countries
Industrial Use
Unit price of 1 kWh, in USD, as of 1 January 1998

Consumption Category:		A	B2	C2	D2	E1	F1	F2
Consumption in MWh/year:		160	1250	4000	15000	16000	50000	70000	VAT	Other
Contracted Amount (kW):		100	500	1000	2500	4000	10000	10000	%	Taxes
Time Required (h):		1600	2500	4000	6000	4000	5000	7000
Country	Currency and Unit
Austria	1/100 ATS	0.1274	0.1036	0.0815	0.0693	0.0795	0.0683	0.0609	20.0	10*/kWh
Belgium	BEF	0.1287	0.0970	0.0802	0.0628	0.0748	0.0553	0.0474	21.0	0.00
France	1/100 FRF	0.0932	0.0773	0.0659	0.0569	0.0659	0.0522	0.0469	20.6	0.00
Eastern Germany	1/100 DEM	0.1440	0.1179	0.0949	0.0794	0.0920	0.0836	0.0747	15.0	0.00
Hungary	HUF	0.0753	0.0586	0.0503	0.0456	0.0503	0.0461	0.0430	12.0	0.00
Netherlands PNEM	1/100 NLG	0.0883	0.0690	0.0581	0.0519	0.0580	0.0536	0.0498	17.5	0.00
Poland Silezia	1/100 PLZ	0.0859	0.0481	0.0411	0.0343	0.0411	0.0343	0.0273	22.0	0.00
Slovak Republic	1/100 SKK	0.1051	0.0767	0.0526	0.0435	0.0480	0.0429	0.0369	6.0	0.00

Source: UNIPEDE: Prices of Electricity as at 1 January 1998, Tariff Network of Experts

Major differences between the prices of energy in Hungary and in EU countries should be removed before Hungary becomes a member of the Union. The EU itself is considering additional taxes on energy supplies so that external costs are reflected in the prices of energy. The European Commission issued a document titled "Environmental Taxes and Charges in the Single Market" in 1997 in which the EU committed itself to introduce those taxes. Another directive issued in 1997 and modified in 1998 about restructuring taxes of energy supplies makes sure, once adopted, that energy taxes, and subsequently, prices go up. Hungary should comply with those directives and regulations, and the earlier it is done, the easier it can be accomplished. Energy prices in Hungary should at least be equal to the prices in Austria today.

Regardless of the decisions made by the EU, several member countries themselves take steps to increase taxes on energy supplies. Examples are presented in Tables 33 and 34.

Tax harmonization is a major issue in countries that wish to join the EU. Interestingly, natural gas and electricity are the two components that are far to meet the tax requirements set by the EU.

Taxes on Electricity in EU Member Countries and Hungary
(not including VAT)
as of 1 January 1997

Country	*VAT*			*Energy and Consumer Taxes*		*Environmental Tax*
	Tax Imposed on	Refund	% of Tax	Type	Value	Type	Value
Austria	Household	No	20.0
	Manufacturing & Trade	Yes	20.0
Belgium	Household	No	21.0	Energy Fees	13.67 BEF/GJ
	Manufacturing & Trade	Yes	21.0	Consumers and Trade
				less than 3517 GJ/year
Czech Rep.	Household	No	5.0
	Manufacturing & Trade	Yes	5.0
Denmark	Household	No	25.0	Energy Tax on Natural Gas	0.23 DKK/GJ	CO₂ Tax	5 DKK/GJ
	Manufacturing & Trade	Yes	25.0	Refund only on Processing		50% Refund only on Processing

Finland	Household	No	22.0	Fuel Tax on Exceptional Consumers	5.04 FIM/MWh
	Manufacturing & Trade	Yes	22.0	Consumers of Other than Energy
France	Household			TICGN Large Consumers	0.693 cF/kWh
	fixed cost	No	20.6	for Consumers of more than 400000 kWh / month
	gas consumption	No	20.6	(over 5 GWh / year)
	Manufacturing & Trade			Special Consumers (Chemicals,
	fixed cost	Yes	20.6	Safety and Storage) Exempted
	gas consumption	Yes	20.6
				IFP Tax with the Exception of the Above	0.040 cF/kWh
Germany	Household	No	15.0	Tax on Gas for Heating	0.36 ph/kWh
	Manufacturing & Trade	Yes	15.0
UK	Household	No	8.0
	Manufacturing & Trade	Yes	17.5
Hungary	Household	No	12.0
	Manufacturing & Trade	Yes	12.0
Ireland	Household	No	12.5
	Manufacturing & Trade	Yes	12.5
Italy	Household	No	10.0	Consumer Tax	ITL/m³
	for heating	No	19.0		nation-wide + regional
	Northern Italy:			Households in Northern Italy	86+10-50
	for heating	No	10.0	Heating in Northern Italy	332+10-50
	Southern Italy			Households in Southern Italy	74+10-50
	Manufacturing & Trade	Yes	19.0	Heating in Southern Italy	238+10-50
				Manufacturing, Handicraft and Agriculture	20+10
Netherlands	Household	No	17.5			Fuel Tax
	Manufacturing & Trade	Yes	17.5			over 10v6 m3	0.6127 F/GJ
	Gardening	Yes	6.0			over 10v6 m³	0.4009 F/GJ
						Ecological Tax	0.90987 F/GJ
						801-170000 m³ Consumption
Spain	Household	No	16.0
	Manufacturing & Trade	Yes	16.0
Sweden	Household	No	25.0	Household and Retail Trade	1.77 ores/kWh	Household and	7.30 ores/
	Manufacturing & Trade	Yes	25.0	Consumers		Retail Trade Use	kWh
						CO₂ Tax
						Industrial and Green House Use	1.82 ores/ kWh

Switzerland	Household	No	6.5
	Manufacturing & Trade	Yes	6.5

Source: Eurogas Study 32, Gas prices and comparative tariffs at January 1996 (GB/EUR/96/692)

On 17 July 1998, the European Parliament approved a document, the Olsson Report, that promoted the implementation of new energy taxes because they were beneficial for the EU. At the same time, a resolution was made (with a final vote of 417 in favour, 80 against and 17 abstentions) to introduce the proposed types of energy taxes as early as possible in all member countries.

By approving the taxes, the European Parliament has expressed the opinion of the general public. A survey carried out by Eurobarometer in 1995 found that 73% of the population in EU member states were in favour of the environmental tax reform, and the rise of energy taxes as a result. (See Table 35.)

By signing the Energy Figurea Accord, Hungary has also agreed and obliged itself to increase energy taxes. Article 3 in Appendix 3 says:

"The contracted parties … shall elaborate proper legislation and regulations to promote and facilitate (among other issues) the following:

a) efficient operations of market mechanisms, including market-oriented pricing and complete reflection of environmental costs and harms…"

The Memorandum signed in Kyoto at the Climate Change Conference requires all nations to work out and implement measures such as "progressive decline and abolishment of market deficiencies, financial incentives, tax and customs relieves and subsidies in all industries that generate greenhouse gases".

Higher energy taxes along with other measures (that are discussed in later chapters of the document) contribute to better energy efficiency and widespread use of environmentally less harmful energy production methods (such as renewable resources of energy, cogeneration of energy, district heating, etc.).

We propose that the current lower rate (12%) of VAT on electricity and natural gas be increased to the higher rate of 25%.

It cannot be explained by rational economic reasons why natural gas and electricity – both seriously harmful to the environment and chiefly using imported raw material– are levied with the lower available tax rate. Their VAT rate should also be raised and set to 25%, just like any other industrial product and fuel. At the same time, tariffs need to be restructured so that household consumers could be compensated without causing financial losses to energy suppliers.

From July 1998 on, customs and related duties on energy supplies from Russia have been reduced by 5%, which brings a loss of revenues of about HUF 15 billion a year. Furthermore, energy prices in the international market have gone down lately, which means that Hungary saved HUF 120 billion in 1998. In 1998, imports of energy supplies cost USD 510 million less than a year before due to international price fluctuations. These two factors alone are well-established grounds for increasing the VAT of natural gas and electricity to 25% without risking a higher inflation rate as a result.

A further reason for the increase is the introduction of the air load fee to be paid by industrial users only. Without increasing the VAT rate of domestic use of electricity and natural gas, the difference between prices of domestic and industrial use would go up, which is against the requirements of a more rational economy, the polluter pays principle and Hungary’s EU accession. The introduction of the air load fee would have an adverse impact on district heating, a less harmful way of obtaining heating. But, if the VAT rate for natural gas and electricity went up to 25%, producers and industrial users could reclaim the higher amount of VAT, and therefore, the difference between prices of domestic and industrial use would be lower.

If implemented, the proposal could serve the purpose of unifying the VAT rate (of 25%) for nearly all types of energy supplies. It is also important to note that the increase would not bring about extra administrative costs, because VAT is a type of tax that has already been paid and is very difficult to evade.

The higher rate could lead to an increase in state revenues worth HUF 60 billion. The higher the revenues, the more funds are available as a pre-requisite to obtain further assistance from the EU.

We propose that new energy taxes be introduced (as explained above). Chapter 2.3 discusses the different types of load fees as a means of taxation.

One of the most pressing issues is closing the Mecsek uranium ore mine in Southern Hungary and subsequent rehabilitation. The costs, however, should not be borne by the central government but by the Central Nuclear Fund (CNF) according to the polluter pays principle. We propose, therefore, a modification to §s 62 and 63 of Act CXVI of 1992 on Nuclear Energy, and an increase in the amounts to be paid into the CNF. The increase should be sufficient to cover the costs of rehabilitating the mining area. The modification would have made it unnecessary to set HUF 3658.5 million for that purpose from the state budget. A correction can only be made in the budget for the year 2000 when the CNF could be debited with the same amount and the additional costs that arise in the course of rehabilitation.

Hungary’s only Nuclear Energy Plant in Paks should pay an additional HUF 6 billion a year for the next 15 years into the central budget since it has failed to pay not only the interests of the subsidies received from the government for the investment but also the capital adjusted with an ever-increasing inflation rate. Furthermore, the debt service has been deducted as costs, so the central budget collected fewer taxes. (See details in the study titled Why is an Energy Price Increase Unavoidable and How can This Increase Be Implemented?)

Capital investments are expected to increase in the aftermath of privatisation to obtain an 8% return on assets. New owners are interested in setting up new plants (such as power stations) to increase their development expenditure. These investments, however, are rarely justified at the macro level, and the costs involved are out of control. Both economic and environmental considerations require that real improvements in energy efficiency be preferred to the establishment of new power plants.

New plants, of course, may be necessary in the future; but special care should be paid that these investments are preferred which involve the least costs and environmental impact. Cogeneration of energy should be prioritised, that is plants that are capable of producing heat and electricity at the same time. On the other hand, investments such as a power station using the lignite mined in North-eastern Hungary should be cancelled. It would not only cost hundreds of billions of forints but it would also bring about extensive pollution, a large increase of external costs and it would be against international environmental agreements that Hungary have signed. If the plant is not built, energy prices could grow at a lower pace, which, in turn, could hold back the rate of inflation.

Well-structured state regulations on capital investment in the energy sector could ease the pressure on the budget and free funds for other purposes.

2.2.5. Increase of VAT on Chemicals Used in Agriculture and on Other Products

Giving low priority to energy-intensive products can encourage more rational use of energy. To that end and for the interests of the environment, it is vital to review Attachment 1 (Products and Services Subject to 12% VAT) of Act LXXIV of 1992 on Value Added Tax. The table below gives an understanding what products need to be shifted into the 25% VAT group.

Products such as artificial fertilisers, insecticides and pesticides are not justified to be in the lower rate (12%), what is more, the current practice reflects an attitude that does not respect environmental considerations at all.

Producing artificial fertilisers is an extremely energy-intensive process. (See details in the study Why is an Energy Price Increase Unavoidable and How can This Increase Be Implemented?)

One of the most important interests of Hungary is to sustain agriculture for long term, and to protect it from environmental damage. A crucial factor of the environmentally friendly agricultural production is the protection of soil, plants, animals as well as human beings from the extensive use of products that are harmful to their health. The use of chemicals radically dropped in the transition period, in the early 90s in Hungary. Unfortunately, recent years have seen a slight increase again. Further increase could be partly avoided if the rate of the VAT on certain chemicals were increased to 25%. The increase would hardly affect large-scale farming since they reclaim VAT regardless of its rate; but the increase would be high enough to prevent or reduce the use of chemicals for small-holders who find it difficult to follow the most up-to-date rules of chemical use anyway, and this way, could put more effort in a more environment-conscious farming.

The European Union also supports the idea of applying fewer chemicals in agriculture. Land used for cultivating "bio" products in Austria increased tenfold during the past five years. In Denmark, Finland and Sweden, ecological tax is imposed on herbicides. The only products that are allowed to enter the EU from Hungary without any restriction are those that are grown without the use of chemicals.

The majority of chemicals as well as raw materials for producing those chemicals in Hungary come from imports. Their restricted use could improve Hungary’s balance of payments and the competitiveness of the Hungarian labour force.

At the same time we propose that extra revenues resulting from the VAT increase on chemicals be used to support bio farming in Hungary.

The measures described above may reduce the rate of unemployment since chemical-free farming requires more labour.

All the above is supported by studies and assessments titled Environmental Protection and Integration carried out by the Hungarian Academy of Sciences in its Strategic Research Programme.

Expected state revenues from the VAT increase (not including reclaims) amount to HUF 4.5 billion and 3 billion from artificial fertilisers and pesticides respectively.

Disposable diapers are seriously harmful to the environment not only because their production is rather energy-intensive but they are not capable of being reused and end up in waste tips. A "waste catastrophe" may well expected after the extensive use of disposable and non-reusable products in the last decades. A single child "generates" a ton or so of disposable diapers; promotion tools would be necessary to reduce their use. The absorbing layer of the diaper is made from cellulose that could be used for other, better purposes. Additionally, most of the diapers come from imports, deteriorating the balance of payments this way. The VAT increase is likely to bring HUF 1 billion for the state budget.

The proposals in this chapter could contribute to the state budget with a net HUF 3 billion a year.

Environmental Load Fees (ELF) should be introduced as soon as possible as a means of revenue distribution in a more fair and reasonable manner. The current unfortunate practice of allowing activities that damage the environment without paying its costs gives the way for companies to increase their profits at the expense of their competitors. The introduction of ELFs attempts to change that practice, and make sure that environmentally harmful activities are not preferred to those using more labour and intellect; therefore, Hungary’s economy could move ahead at a faster rate.

Scientific research supports the fact that the later it is done, the more it costs to remove environmental damage. So, the prices of environmental components (air, water and soil) need to be involved in economic planning by the polluter pays principle. ELFs are efficient means of controlling economic processes through encouraging the "user of the environment" to reduce and prevent pollution, and providing them with financial assistance to achieve this goal from the generated revenues. If ELFs perform well, the society may benefit from an improved state of environment and health. Competitiveness would be increased as well once technology is transformed and developed into an environmentally conscious state, which is inevitable for further improvement anyhow.

ELFs are designed to serve sustainable development through a quality improvement in economic activities.

The direct impact of ELFs on the annual inflation rate is not expected to exceed 0.3% or 0.5%. The actual percentage depends upon which of the versions (Version A – lower fees, or Version B – higher fees) proposed by the Ministry of Environment is approved. ELFs are planned to be introduced gradually, which means that the figure will be only 0.01% (Version A) or 0.15% (Version B) in the first year. Considering indirect impacts as well, ELFs may not increase the rate of inflation at all, or rather, by reducing environmental harm and health problems and providing support for restructuring the economy, they reduce costs at the macro level, that is, they have an anti-inflationary effect.

The Ministry is elaborating ELF schemes as required both by environmental considerations and by the Act LIII of 1995 on General Rules of Environmental Protection. Their work is in line with our ideas, therefore, ELFs are only discussed in brief in this document.

ELFs should be introduced so that the revenues generated by them are principally used for local improvements.

Since funds for environmental purposes are scarce in Hungary, other techniques and tools serving long-term goals need to be selected. All means are appreciated that reduce pollution through their indirect impact. These should be treated as available funds dedicated for environmental protection in Hungary when putting them forward to the European Union, and these should form the base for financial assistance from the EU. This practice is in compliance with the requirements of a market-driven economy.

Expected Revenues from Environmental Load Fees
billion HUF
lower rate calculations (Version "A")

Even the higher rates are incapable of covering the costs of damage that environmentally harmful activities cause. Therefore, we propose that ELFs are introduced as soon as possible at the highest possible rate.

The quality of air in Hungary has improved in the last decade, however, in absolute terms in many places it is often still worse than the approved limit values of ambient air quality. "Polluted" areas are decreasing in size but the total area that is "polluted or slightly polluted" is expanding. The latter two categories comprise over the half of Hungary’s population.

The rate of Air Load Fee (ALF) is calculated by the quantity and the level of hazard of polluting substances emitted into the air annually.

The Ministry of Environment has presented a study titled Impact Assessment of Environmental Load Fees, and published their estimates. Supposing the higher rates are introduced (see Table 38) and ALF will not change in real terms, the emission of sulphur-dioxide and nitrogen-dioxide will drop by 72 and 2.1 thousand tons respectively. The consequent environmental returns will be higher than the costs of reducing pollution. Furthermore, payers of ALF will be offered a portion of the fee to finance their capital investments needed for reducing the emission. It is also expected that new penalties will be introduced as well as relevant laws and the system of financial assistance will be modified, which – along with the above-mentioned factors – may reinforce the efforts. Even if the lower rates would be introduced, pollution will fall. Significant improvement, however, can only be expected after the first five years of the gradual implementation of ALF at the highest achievable rate. Most of the revenues from ALF could come from the electric energy sector, but mining, manufacturing goods of non-metallic minerals as well as metallurgy and metal processing could take a significant share.

Although the quality of water has also proved to be better for the past few years, it is not entirely satisfactory for various uses and life in and around waters of Hungary. It is vital to prevent pollution and contamination of aboveground waters to protect people from diseases and to preserve or even improve ecological value of waters. Hungary is required by international standards and by the desired EU membership to take measures and establish economic incentives to achieve those goals. The impact of the Water Load Fee (WLF) can only be considered with the system of regulations, consequently, it should be defined and calculated in compliance with other components of that system.

The rate of WLF is calculated by the total quantity of polluting substances discharged into waters annually. The rate may vary with the hazard that the pollutant represents and with the specific character of the contaminated area. (See Tables 39 and 40.)

It is estimated that direct discharge of polluting substances into waters will go down by 3.14% if lower rates are introduced. Some bigger towns in the country may be encouraged by this figure to initiate capital investments to improve water quality. If higher rates are introduced, the decrease of discharge will be 36% or so (expressed in units of toxicity) , which will affect first of all Budapest and its surroundings with the Danube as its main water stream. Capital investments here will be used for completing and improving sewage disposal of the area.

Urban development, industry and military activities have done significant damage to the soil and underground water reserves. Potential and actual pollution has been growing over the past decades.

Soil Load Fee (SLF) serves the purpose of protecting the soil and underground waters. It should be imposed on desiccation and storage of waste water. SLF would eliminate, or at least reduce, contamination from desiccation of domestic waste water (one of the key pollutants in urban areas) by making people interested in using a more convenient public utility service at a price that is close to SLF. In addition, it would also cut back on soil contamination caused by farmers. The rate of SLF is calculated by the quantity of water provided. The rate may vary with the hazard and with the specific character of the area; and it will amount to HUF 30 / m³ or HUF 60 / m³ depending on which version is introduced.

Households should bear 84% of the costs of SLF, whereas large consumers – the remaining 16%. It means that the majority of industries will not or will be slightly affected by the fee. (The only sectors concerned are electric energy and heat generation, gas and water supply, food processing and mining.) SLF as an incentive can only work efficiently if the rate is defined high enough to exceed investment costs of the utility or the sewage system. A gradually introduced lower rate (say HUF 12 / m3) alone could only encourage expansion of the existing sewer system, and only in settlements other than Budapest.

Collecting WLF and SLF as a form of tax can slow down the pace of increasing the price of utilities (water and sewer systems). It would also make sure that funds are available for investments. Those two fees would be exempt from VAT and would lower profitability, and consequently, income taxes of companies. WLF and SLF should only be used for investments, and because of their tax-like nature, the use of funds could be easily monitored and controlled.

Environmental taxes, the so-called product charges, are already implemented, however, their role and efficiency should be reviewed to see whether they need to be increased or new ones to be introduced.

We propose that existing environmental taxes should be increased and, at the same time, we do not agree with the Government’s proposal to raise them only by the rate of inflation projected for 1999; the base of calculation should be the inflation rate in 1998. It is important to note that environmental taxes failed to follow the rate of inflation over the past few years as a rule. In 1996, for instance, these taxes did not go up at all.

To meet the objectives of suppressing environmentally harmful activities and accomplish the tasks of environmental protection, environmental taxes need to be much higher than they are today. That is why we share the opinion of the Parliament’s Environmental Protection Committee (EPC) that proposes a higher increase of the taxes than the Government. (See Tables 41 – 45 for details.)

Environmental Taxes on Refrigerators and Refrigerating Substances
I. new equipment

q: rate of tax depending upon the quantity of the refrigerating substance
c: rate of tax depending upon declared capacity

On the one hand, increasing taxes is a must, but on the other hand, taxes need to be imposed on a wider range of products including these enamels, paints and thinners the production and use of which do serious harm to the environment and which can be substituted by other, less harmful products.

The objective of introducing environmental tax on enamels, paints and thinners is not primarily to obtain the funds for eliminating the harms and wastes of those products but rather to get the polluters to pay for the contamination they cause and encourage them to restructure their production in an environmentally friendly manner. Large companies using state-of-the-art technologies are capable of producing environmentally friendly paints – actually accounting for nearly 50% of domestic production. Tools should be developed and introduced to help those products sell better and increase their market share in Hungary. Tax revenues could be used for developing a uniform system of assessing the products by the hazards they represent, and also for elaborating programmes to promote a shift in the Hungarian purchase habits. The environmental tax would be imposed on one unit (i.e. 1 kilogram) of each product, and be defined as 20% of the consumer price.

We do not agree with the modification of the law that gives exemption for US military forces staying in Hungary from paying environmental taxes to the Hungarian government. §1 of the Act LVI of 1995 on Environmental Taxes says: "The objective of the law is to create sufficient funds for preventing or reducing environmental damage caused by products that are directly or indirectly threaten or damage the environment or one of its components in the course of its production or use. It also aims to encourage activities that reduce pollution and do not deplete available natural resources." The Government of the United States and related organisations have provided financial and other types of assistance to Hungary to ease various problems affecting the environment. The modification of the law, however, discriminates in favour of the United States against the state of environment in Hungary. We believe that it contradicts even with the policy that the US has pursued so far. The modification has caused some inconvenience to the US as well since it has been disapproved by environmental organizations.

Expected revenues from increasing the rates of environmental taxes and imposing them on a wider range of products would be HUF 5 billion a year.

We are proposing an increase of mining taxes to a rate that enables the government to collect an additional HUF 10 billion from this source. The taxes could serve the purpose of protecting Hungary’s non-renewable natural resources and irreplaceable reserves of raw materials as well as relieving the adverse effects of mining activities. Unfortunately, the past years have seen a declining trend in collecting revenues of mining taxes; the State Budget Act for 1999 projects only one third of the revenues in 1995. This is especially sad because these revenues are far less than the costs of restoring the damage caused by mining. Funds should be raised, especially to meet the requirements set by the EU for Hungary. EU sources could also be acquired for the purpose.

The total amount of increase could be returned to the companies concerned on condition they use it for restoring the damage. The companies would also benefit from it since it would contribute to their worth and performance. (For instance, MOL, the largest Hungarian Oil Company, registered on the Stock Exchange, could increase the value of its shares this way.)

Both the Environmental Protection Act and Hungary’s commitment to comply with international accords require more severe enforcement of hazardous waste penalties. The largest volumes of hazardous waste (red mud) come from processing aluminium oxide. Hungary’s major plant for processing aluminium oxide in Almásfüzitő (North-western Hungary) has been closed. However, production is being restarted by foreign sub-contractors who, under current regulations, are required to remove all hazardous materials, together with the processed product, from Hungary. While processing one ton of aluminium oxide, two tons of hazardous substances are produced. Storage and treatment of a single ton of red mud cost HUF 50 to 100 thousand. Only the restart of the production may cause damage worth HUF 5 billion, not including indirect government support through relatively low prices of energy that is provided for the highly energy-intensive aluminium oxide processing plants. The successor of the plant attempts to finance production from selling existing processing units in Almásfüzitő. Sales revenues are estimated around HUF 2 billion, which should rather be used for removal of hazardous materials.

Enforcing severe measures are also required by Hungary’s attempt to join the EU.

We propose that revenues of property sales should finance industries where new, state-of-the-art technology is used without creating hazardous wastes. We also propose an international campaign to remove and/or utilise dumping grounds of the already existing 50 million tons of red mud. We should request assistance from the EU and other developed countries to re-use that waste in an environmentally safe manner, and also from the Hungarian government to elaborate a specific programme. Restart of the production initiated by the State Privatisation and Property Management Company (ÁPV Rt.) should be halted by law, and existing facilities should be involved in processes that comply with EU standards and meet quality requirements. Several thousands of people could find long-term jobs this way.

2.4. Protection of Green Areas and Fertile Soils; Taxes Promoting Environmentally Friendly Agriculture

The area of arable land, one of Hungary’s most valuable assets, is diminishing. While the area of land out of agricultural utilisation comprised 6.6% of the country’s total area in 1938, it went up to 11.5% by 1990 and 13.8% by 1996. Industry, mining, transport, commercial and residential areas as well as other buildings occupy more and more land at the expense of arable land – virtually irreversibly. Growing suburban areas, swelling road transport, ever-growing numbers of shopping centres and other green-field investments cause harm not only to the physical environment but also to the entire economy and people themselves. One of the reasons of these problems can be found also in the bad price-system. The price of land in Hungary is only a fraction of that in Western European countries, but even western prices fail to represent all the factors that define the real value of land. If implemented, our proposals listed below and detailed in Appendix 3 could help the prices move closer to the real values. They could encourage investors to prefer brown-field sites (areas of land that have been deteriorated due to industrial or other use) to green-field ones, which would be beneficial for both the environment and urban development.

Similar measures are expected to be taken in several EU countries. In Germany, the Parliament’s Human and Environmental Protection Committee (Enquete-Komission "Schutz des Menschen und der Umwelt") made a proposal in 1998 to introduce taxes to protect arable land and green areas. Measures proposed by the Committee would prevent further shrinking of arable land by 90% by 2010 compared to the area in 1995. The British Parliament is also considering taxes as means of protecting green areas, and it is attempting to restrict land available for housing, industry and road construction use.

§1 of Act LV of 1994 on Arable Land says: "When arable land is utilised for other than agricultural use, a one-off soil protection tax (SPT) is to be paid to an account specified by law".

The current rate of the tax is so low that it fails to encourage users to protect the land in its original use. Therefore, SPT needs to be multiplied (see Appendix 3 for details). The increase of the tax could prevent invaluable land areas from being squandered.

The purpose of this measure is not to generate new revenues, but to stop wasting the land and using for other than its core purpose. Even a high increase proposed could generate extra revenues of only HUF 1 billion a year, because hopefully the demand for converting arable land to other uses would decrease substantially.

The Act on Arable Land (see above) defines arable land as "land that is registered as ploughing land, vineyard, orchard, garden, grassland, reeds, forests or fish ponds in the outskirts of an urban area."

SPT should be imposed not only on the types of land that are defined by the present law, but also green areas and potential green areas that are not part of the built environment yet. Furthermore, the rate of SPT should be significantly higher in central areas than in outer edges of settlements. The tax should also be paid when arable land or a non-built-in area is destroyed by construction of a residential area (according to the present law, this is now exempted from the SPT).

2.4.3. "Radó" Methodology for Value Assessment of Trees and other Plants

The current practice of assessing the price of a tree cut is to determine its value as firewood. It is needless to say that such a price is far from being the real value of the tree, because a tree has dozens of functions that worth more than firewood. (This is true everywhere but it is especially so in densely inhabited areas.) Dr. Dezső Radó and his team have elaborated the methodology of assessing the real value of trees and other plants, and it has been published by the Ministry of Domestic Affairs as a recommended way of assessing the value. By making it mandatory, the Government could obtain extra revenues, and people would think twice before they cut a tree out.

Extra revenues are difficult to estimate. But the primary goal here is not to generate immense revenues but rather prevent green areas from being destroyed. A rough estimate of the revenues would be HUF 2 billion a year.

(The methodology is available in Hungarian in the offices of Clean Air Action Group. We are ready to send a copy to those who are interested at the costs of photocopying and mailing.)

Agriculture needs to be developed in a way which causes the least possible harm to the environment. This way agricultural development can be sustainable and Hungary can comply with agricultural schemes of the EU. Environment-oriented taxes could be one of the means to achieve those objectives. The taxes are divided into three groups:

Revenues from the taxes have not as yet been defined; further research is necessary. However, they should be used for agriculture-related environment management.

Large areas covered by concrete are unable to drain precipitation waters in sufficient quantities, therefore, further canal construction is required. We are proposing a penalty to be paid according to the size of the concrete pavement (besides existing fees of water drainage and penalties), and the necessary modifications to the decree (4/1984. II. 7.) issued by the National Water Management Authority.

Taxes paid to local governments by local companies and entrepreneurs often have a critical impact on the state of green areas. That is why we feel logical to discuss the issue in this chapter, although we understand that local governmental taxes are in close and more complex relation with other factors as well.

Local governments use all possible means to attract big investors, sometimes at the costs of environmental and health protection considerations and local green areas. The reason is that local governmental taxes from businesses are one of the most crucial sources of revenues for local governments. (For instance, of the total revenues of HUF 190 billion of the Budapest Municipality in 1998, this tax accounts for HUF 28 billion, i.e. 15%.) The competition among local governments for industrial plants, shopping centres, power stations and other environmentally damaging activities is keen, leaving room for corruption. The tax itself compels local governments to play against each other and also neglect the interests of the local residents. Gradual reduction or even abolishment of the tax could calm down this "competition". We are proposing a rate of maximum 1% from 1 January 1999 on.

Lost revenues can be offset by raising the share of central governmental revenues from the personal income tax allocated to local governments. (Imposing environmental taxes on environmentally harmful activities could counterbalance the loss in central governmental revenues, in turn.) At the same time, local governments should charge local environment-related taxes and fees so that the share of locally collected funds is increased and harmful activities are controlled. This objective can be achieved by applying the upper ceiling of the motor vehicle tax, introducing and/or raising parking charges and road tolls, imposing the highest possible penalties allowed by legal regulations, etc.

It is important to underline that reduction or abolishment of local governmental taxes from businesses is only feasible if other sources of funds are made available for local governments to make up for their lost revenues.

Consumer taxes (excise duties) on alcoholic beverages and tobacco have not kept pace with the rate of inflation. Unfortunately, this has been an indirect promotion for consuming harmful products against the interests of society (primarily families). Consumer tax rates should be increased to the level of rates in Austria in 1999.

In August 1996, consumer prices of tobacco were 36.1% higher than in the previous year. Consumer taxes however, increased only 7.6% over the same period, i.e. while prices went up significantly, the consumer tax saw only a minor increase. Domestic sales and volumes of tobacco increased by 9.2% in 1997. It means the consumer tax fell not during a drop in consumption but, just the opposite: consumer taxes went down while consumption was getting higher. Consumer prices of cigarettes went up by 19.9% in 1998, whereas the average increase in consumer prices was 14.3%. Tax revenues from tobacco taxes, however, were higher by 11.8% only, and the bulk of the increase is estimated to come from stricter enforcement of collection and the unfortunate rising trend of consumption. It also means that unless consumer taxes rise at least by the rate of inflation, tobacco companies will be able to increase their profits at the expense of state revenues. Furthermore, the more such products are sold, the more people need healthcare, which is paid by society. So much about the government’s anti-inflationary policy.

Excise duties of tobacco and alcoholic beverages went down by an average of 20% in real terms in both 1996 and 1997. Tax revenues from alcoholic beverages went up by 7% (when the inflation rate was 14.3%). Since tax rises have followed a similar trend over the past few years, i.e. they have been increased by a lower rate than the rate of inflation, consumption of goods that are harmful to the health have become cheaper in comparison to either average prices of previous years or those of food. The declining trend should be stopped. The government has made a step forward and increased tobacco taxes at a slightly higher rate than that of the inflation in 1999. However, a much higher increase is necessary in 2000.

Figure 7 illustrates the average level of taxes in the EU that Hungary has to meet. By EU standards, tobacco taxes cannot be less than 57% in all member states. In Hungary the average level is much lower; a typical example of one of the most common cigarettes (Sophiane) is only 40.6%. This is an issue where Hungary should comply with EU standards as early as possible.

Some argue that an increase in tobacco taxes would lead to more smuggling of the product. On the one hand, smuggling from Hungary to EU countries would fall radically as a result of the increase, and on the other hand, cross-border smuggling should be stopped by severe enforcement of measures and sanctions.

Should taxes on tobacco and alcoholic beverages be raised to the level in Austria, state budget revenues may well increase by several billions of forints. Provided the government had the tools to curb the black economy, collection of those billions (plus VAT) can be realistically expected. The collected amount should be transferred to social security accounts.

We feel it is important to note that harmful effects of beverages and tobacco may cost a lot more than several billions. Research studies in the EU and the US, for instance, proved that costs of the damage caused by smoking and borne by the whole society are much higher than revenues from taxes collected from sales of tobacco. A similar study in Hungary by GKI Gazdaságkutató Rt. and Alius Kft. (economic research firms) have attempted to define the losses caused by smoking, and concluded that these amounted to HUF 337-378 billion in 1995 (see Table 46 below). Data in the study are underestimates as several factors such as fire and other accidents caused by smoking have not been included. (6.5% of industrial fire accidents in the UK can be blamed on smoking, for example.) At the same time, state revenues from tobacco taxes were not more than HUF 44 billion in that year. Other revenues amounting to HUF 18 billion from the tobacco industry (e.g.: VAT, customs duties, social security tax and health insurance fees) should not be considered here, because these are "overhead" costs for general financing at the macro level just like revenues of that kind from other industries. Moreover, losses are likely to be even higher because no taxes are paid at all on the majority of costs of smoking.

Revenues of nearly HUF 30 billion can be expected a year if taxes on tobacco and alcoholic beverages are increased, of which 7 billion could be used for health campaigns, primarily to those against smoking and helping people give up smoking. (Tobacco companies spend the same amount yearly on advertising.) The amount could be transferred to the accounts of the Health Insurance Fund, granting them additional resources to the HUF 26.7 billion that is available for them by law (Act XCI of 1998).

We are proposing additional consumer taxes to be imposed on a well-defined group of luxury goods such as expensive motorcars, jewels and luxury services, etc. Specifics have not been worked out yet, so it may take time before those taxes are introduced, probably in 2000. The tax would be levied on imported goods in the first place, so it could improve the competitiveness of domestic products. It could also offset the adverse impacts of descending customs duties over the past years.

Taxes should be imposed on the consumption of luxury goods to favour domestic businesses and industry. Although those taxes are not titled against foreign goods, it is true of Hungary that imported goods of higher prices are preferred to domestic ones. Therefore, besides protecting the domestic industry, consumer taxes on luxury goods contribute to the profitability of Hungarian companies, and thus, higher tax revenues. Another reason for introducing those taxes is that they may counterbalance lost revenues from customs duties. It would be essential to increase the accumulation of savings at the expense of the consumption of luxury goods. Therefore, taxes levied on them are not only sources of state revenues but also help determine a new direction of thinking in the society.

Extra revenues from this source would be around HUF 10 billion. We propose that they should be used for reducing social security taxes. At the same time, the tax could reduce the price level, and, consequently, inflation. The same trend would be seen in the prices of imports, so it is also a means of improving the balance of trade.

2.5.3. Culture Tax on Products and Services Involving Pornography, Sex and Violence

Violence and pornography have become universal on TV and video, in cinemas as well as in printed materials. It is needless to discuss all the harm they do to the society (deviation, crime, etc.); scientists, psychologists, teachers and others have done it several times. The harm can be measured in money as well. Therefore, we are proposing a change of taxes on products and services involving pornography, sex and violence – from 20% in 1998 to 50%.

The same considerations have led us to propose an increase of taxes on toy guns from the current 10% to 30%. Toy guns are means of making children accustomed to violence, increasing violent events. Another reason is that we would like to join the initiative of young people in Croatia who, among other things, urge abolishment of sales of toy guns.

The government and the parliament have considered our proposals, and the tax rates have been increased to 25%. We hope that taxes will be raised further in the state budget for 2000. Table 47 illustrates the products and services as well as the tax rates as today (in brackets) and as proposed (underlined).

Proposed Increase of Culture Tax on Products and Services Involving Pornographic, Sexual and Violent Features

Supposing strict collection of the tax, extra revenues from this source are estimated to reach HUF 2 billion a year.

We are proposing an overall 14% increase of taxes on advertisements (or 14.5% on advertisements published in the press). Table 48 illustrates the media where advertisements appear and the relevant tax rates as today (in brackets) and as proposed (underlined). Extra revenues from this source could be used for educational advertising (public interest advertising for the environment, health, etc).

In addition to the above, we are proposing a 50% tax rate for leaflets, printed materials distributed by mail, other promotion materials and advertisements in papers in which advertisements occupy over 70% of the total space. Advertisements of that kind have been abundant, and become an undesired part of people’s lives as "junk mail", not to mention the waste and environmental harm they represent. (More and more people put signs on their mail boxes that say they refuse unwanted publicity materials.)

All the above is applicable to commercial advertising only. Non-commercial and political advertising should be exempt from this tax.

Our proposals could serve the purposes set by the introductory section of the relevant law, especially of protecting consumers’ rights, sustaining competition in the market for a more efficient economy and social welfare, and providing objective information to the public. Commercial advertising underlines only the strengths of a product or a service. When advertising a car, the manufacturer or the agency never warn about the serious environmental and health impacts of road transport. Have advertisements of detergents ever mentioned the environmental harm the products cause when they are discharged into waters? Or, have commercials of food or drinks ever described all the beneficial or harmful impacts that the products have on the human body? The answer is obviously no, which means that the interests of consumers are disregarded, the competition is distorted and information is inadequate. The damage caused can be removed if

From en economic point of view, taxes on advertisements represent the external costs of the negative impacts of advertising.

Freedom of the press may also be jeopardised if newspapers and periodicals are dependent upon commercial advertising. The International Institute of Journalists issued a publication in 1997 saying: "Hungarian media have only been given the freedom of writing about what they really want to only on paper; actually, the borderline between advertisers and editors are vague due to the increasing pressure from the market… Ten of the eleven daily newspapers in Budapest are on their way to go bankrupt, and the management cannot but demand that journalists humiliate themselves in front of people on whom they depend for money, or else they take the risk of losing their jobs. Reporters write appealing ‘false reports’, and some of them are struggling for a salary rise, let’s say 20% of the income from the advertisement." (Source: Hungarian Daily Magyar Nemzet, 6 January 1997.) The risk could be lower by opening up opportunities for educating, non-commercial advertising.

Some say that raising this tax would lead to a higher inflation rate. In reality, the opposite is true. On the one hand, the 14% increase would only generate a slight increase of costs of the advertisers (0.5%), and on the other hand, accurate and unbiased information (about economical use of energy, for example) is a good means of encouraging savings, which, in turn, lead to lower rates of inflation.

Expected extra revenues from this source could go up to HUF 15 billion or so. This amount could form the base of funds for non-commercial communications and educational advertising. (See Chapters 4.7.1 and 7 for details.)

The proportion of extra revenues that come from the press and the electronic media should be returned to the source of origin provided they use it for non-commercial advertising.

Additional taxes on advertisements are far from being unprecedented in the international practice. In Sweden, for instance, a 4% tax has been levied on advertisements published in newspapers and periodicals, and a tax of 11% (!) on those shown in other media.

It seemed to promise a lot when some members of the parliament sitting on the government benches were sharing our views about the issue, and with the consent of the Ministry of Finance they put forward a proposal to modify the tax rate by 1 %. At the same time, we had the opportunity to see how strong and immoral the advertisement lobby was; they managed that the government, and subsequently the parliament rejected the proposal.

Advertisements on tobacco should be banned, by all means, by 1 January 2000 at latest. Clean Air Action Group supports the opinion of several healthcare and related organisations that have voiced their concerns and opinion about the topic for several occasions. Some issues are hardly mentioned though. It is common knowledge that state of health in Hungary is among the worst in all European countries. Therefore, it is especially unethical to promote a habit that aggravates this problem. Banning advertisements is an unavoidable ethical issue for all governments, which launch attacks against ethically disallowable activities and behaviour.

Smoking involves external costs, i.e. costs that are not paid by smokers only but by the entire society. "Nearly all experts share the opinion that state revenues from smoking are notably less than the costs of healthcare. This is especially sad in a country where the death rate of heart and cardiovascular diseases is 52%, and that of cancer is 22%, and when it is indisputable that there is a clear relationship between smoking and the two types of diseases mentioned." – said the Minister in charge of Social Welfare on a parliament session on 16 April 1996. Unfortunately, the powerful tobacco lobby prevented proposals and modifications to restrict advertising of tobacco products from being accepted.

Consumption of cigarettes is extremely high in Hungary (see Figure 8), which might be reduced if advertisements were banned.

It is common knowledge that a large proportion of exports and imports are handled through intermediaries in Hungary. However, we should not alter the current structure of exports otherwise exports would decline. Until export financing through loans is completely solved, the issue of intermediary trade in exports is not relevant anyway.

A growing share of imports to Hungary is handled by intermediaries, which was nearly USD 2.1 billion in 1995, over 2.4 billion in 1996 and nearly HUF 3 billion in 1997 (see Tables 49 a, b and c). More and more goods are imported through intermediaries from developing and ex-COMECON countries. This has adverse effects on the economy. First, intermediaries gain extra amounts of commissions, or sell the goods at a higher price. Second, they offer goods that compete with Hungarian-made (primarily processed) goods in markets where technology levels allow Hungarian products to enter. This aggravates the structural crisis of the Hungarian industry. Intermediary trade is linked to the Mafia and the black economy. Therefore, it is urgent to take decisive measures against it, as also required by international agreements signed by Hungary. Intermediary trade has increased since the collapse of large state-owned foreign trade monopolies whose employees went to the marketplace to sell their knowledge to whoever paid the most for it.

Paragraph (3) of a Government Decree (112/1990. - XII. 23.) regulates imports of goods and services. In specific, it says that imports from countries with which bilateral relations are not based on market-oriented institutions and instruments are subject to licence. Licence fees could finance some of the costs involved in customs clearance, inspection and other expenses as well as increase revenues by a total of HUF 10 billion.

The government should initiate actions. As a result, Hungarian exports to ex-COMECON and developing countries might well be expected to surge by USD 1 billion a year, moreover, the structure of exported goods may improve. (Machinery or other processed goods could be sold.) It would create demand for domestic labour; another 100 thousand or more people could find a job. This structural change would increase state revenues by HUF 50 billion a year, and improve the external balance of payments by USD 0.5 billion annually.

Hungarian-Russian trade relations are also relevant here. A detailed study of the impacts of declining exports and imports can be found in Appendix 5.

Exports and Imports Structure by Groups of Countries and by Commodity Classifications in SITC
(including data of industrial free zones from 1996 on)
million USD

	Developed Countries				Developing countries*				CEE
	1995	1996	1997	1998	1995	1996	1997	1998	1995	1996	1997	1998
COUNTRY OF ORIGIN / DESTINATION
EXPORTS
Food, Beverages	1205.3	1255.8	1158.1	1199.3	170.0	109.1	143.7	170.4	1220.8	1020.2	1166.3	1054.6
Crude Materials	510.6	477.8	448.2	452.7	18.0	15.9	25.5	25.8	175.6	194.7	254.7	198.2
Energy	271.9	356.0	327.1	297.9	12.2	9.6	7.6	7.1	130.8	164.0	172.5	130.1
Manufactured Goods	4456.6	4874.9	5067.0	5711.9	344.1	294.3	276.8	216.6	1054.6	1231.1	1443.2	1593.6
Machinery	2493.1	4994.0	7801.0	10808.7	250.4	199.9	185.7	459.3	552.9	506.5	622.3	679.3
Total	8937.5	11958.5	14801.4	18470.5	794.7	628.8	639.3	879.2	3134.7	3116.5	3659.0	3655.8
IMPORTS
Food, Beverages	426.8	398.4	439.1	483.9	310.1	339.1	350.3	346.1	78.0	78.3	107.0	129.8
Crude Materials	304.0	282.7	324.6	331.8	54.3	83.1	93.5	138.3	328.6	278.3	277.7	292.3
Energy	164.9	118.8	232.4	204.3	32.4	31.9	2.0	6.2	1603.7	2044.3	1816.4	1480.6
Manufactured Goods	5821.3	6403.1	6846.2	8073.6	226.3	418.2	470.9	734.3	1360.7	1201.6	1395.3	1522.3
Machinery	4176.0	5751.6	7587.4	10105.9	233.4	465.9	929.9	1396.6	345.8	248.4	361.2	460.4
Total	10893.0	12954.6	15429.7	19199.5	856.5	1338.2	1846.6	2621.5	3716.8	3850.9	3957.6	3885.4
BALANCE
Food, Beverages	778.5	857.4	719.0	715.4	-140.1	-230.0	-206.6	-175.7	1142.8	941.9	1059.3	924.8
Crude Materials	206.6	195.1	123.6	120.9	-36.3	-67.2	-68.0	-112.5	-153.0	-83.6	-23.0	-94.1
Energy	107.0	237.2	94.7	93.6	-20.2	-22.3	5.6	0.9	-1472.9	-1880.3	-1643.9	-1350.5
Manufactured Goods	-1364.7	-1528.2	-1779.2	-2361.7	117.8	-123.9	-194.1	-517.7	-306.1	29.5	47.9	71.3
Machinery	-1682.9	-757.6	213.6	702.8	17.0	-266.0	-744.2	-937.3	207.1	258.1	261.1	218.9
Total	-1955.5	-996.1	-628.3	-729.0	-61.8	-709.4	-1207.3	-1742.3	-582.1	-734.4	-298.6	-229.6

Exports and Imports Structure by Groups of Countries and by Commodity Classifications in SITC
(including data of industrial free zones from 1996 on)
million USD

	Developed Countries				Developing countries*				CEE
	1995	1996	1997	1998	1995	1996	1997	1998	1995	1996	1997	1998
BY CONTRACTING COUNTRIES
EXPORTS
Food, Beverages	1715.4	1508.4	1533.4	1565.0	50.8	83.4	90.9	103.6	829.8	793.3	843.8	755.6
Crude Materials	584.5	569.2	599.2	557.4	10.8	9.3	19.1	15.6	108.9	109.8	110.0	103.5
Energy	366.1	473.0	438.4	362.1	8.7	11.5	8.7	10.7	40.1	45.1	60.1	62.4
Manufactured Goods	4802.9	5127.9	5364.4	5993.3	222.0	285.0	243.9	191.1	830.5	987.3	1178.7	1337.7
Machinery	2652.2	4984.7	7846.3	10930.4	106.6	250.9	170.3	403.8	537.6	464.8	592.5	613.0
Total	10121.1	12663.2	15781.7	19408.2	398.9	640.1	532.9	724.8	2346.9	2400.3	2785.1	2872.2
IMPORTS
Food, Beverages	578.4	595.7	667.7	686.4	186.8	178.3	156.3	170.9	49.8	41.8	72.4	102.6
Crude Materials	475.5	441.9	523.2	572.3	24.8	31.0	26.5	32.4	186.5	171.2	146.1	157.7
Energy	1040.1	1356.0	1303.5	1094.4	2.9	1.5	0.9	0.2	758.1	837.5	746.4	596.0
Manufactured Goods	6587.5	7030.9	7631.2	9103.5	150.0	288.7	248.6	276.4	670.8	703.3	832.6	950.3
Machinery	4281.8	5949.3	8238.2	10844.7	150.5	286.2	312.1	732.2	322.9	230.5	328.3	385.9
Total	12963.3	15373.8	18363.8	22301.3	515.0	785.7	744.4	1212.1	1988.1	1984.3	2125.8	2192.5
BALANCE
Food, Beverages	1137.0	912.7	865.7	878.6	-136.0	-94.9	-65.4	-67.3	780.0	751.5	771.4	653.0
Crude Materials	109.0	127.3	76.0	-14.9	-14.0	-21.7	-7.4	-16.8	-77.6	-61.4	-36.1	-54.2
Energy	-674.0	-883.0	-865.1	-732.3	5.8	10.0	7.8	10.5	-718.0	-792.4	-686.3	-533.6
Manufactured Goods	-1784.6	-1903.0	-2266.8	-3110.2	72.0	-3.7	-4.7	-85.3	159.7	284.0	346.1	387.4
Machinery	-1629.6	-964.6	-391.9	85.7	-43.9	-35.3	-141.8	-328.4	214.7	234.3	264.2	227.1
Total	-2842.2	-2710.6	-2582.1	-2893.1	-116.1	-145.6	-211.5	-487.3	358.8	416.0	659.3	679.7

Intermediary Trade Structure by Groups of Countries and by Commodity Classifications in SITC

	Developed Countries				Developing countries*				CEE
	1995	1996	1997	1998	1995	1996	1997	1998	1995	1996	1997	1998
EXPORTS
Food, Beverages	510.1	252.6	375.3	365.7	-119.2	-25.7	-52.8	-66.8	-391.0	-226.9	-322.5	-299.0
Crude Materials	73.9	91.4	151.0	104.7	-7.2	-6.6	-6.4	-10.2	-66.7	-84.9	-144.7	-94.7
Energy	94.2	117.0	111.3	64.2	-3.5	1.9	1.1	3.6	-90.7	-118.9	-112.4	-67.7
Manufactured Goods	346.3	253.0	297.4	281.4	-122.1	-9.3	-32.9	-25.5	-224.1	-243.8	-264.5	-255.9
Machinery	159.1	-9.3	45.3	121.7	-143.8	51.0	-15.4	-55.5	-15.3	-41.7	-29.8	-66.3
Total	1183.6	704.7	980.3	937.7	-395.8	11.3	-106.4	-154.4	-787.8	-716.2	-873.9	-783.6
IMPORTS
Food, Beverages	151.6	197.3	228.6	202.5	-123.3	-160.8	-194.0	-175.2	-28.2	-36.5	-34.6	-27.2
Crude Materials	171.5	159.2	198.6	240.5	-29.5	-52.1	-67.0	-105.9	-142.1	-107.1	-131.6	-134.6
Energy	875.2	1237.2	1071.1	890.1	-29.5	-30.4	-1.1	-6.0	-845.6	-1206.8	-1070.0	-884.6
Manufactured Goods	766.2	627.8	785.0	1029.9	-76.3	-129.5	-222.3	-457.9	-689.9	-498.3	-562.7	-572.0
Machinery	105.8	197.7	650.8	738.8	-82.9	-179.7	-617.8	-664.4	-22.9	-17.9	-32.9	-74.5
Total	2070.3	2419.2	2934.1	3101.8	-341.5	-552.5	-1102.2	-1409.4	-1728.7	-1866.6	-1831.8	-1692.9
BALANCE of Intermediary Trade
Food, Beverages	358.5	55.3	146.7	163.2	4.1	135.1	141.2	108.4	-362.8	-190.4	-287.9	-271.8
Crude Materials	-97.6	-67.8	-47.6	-135.8	22.3	45.5	60.6	95.7	75.4	22.2	-13.1	39.9
Energy	-781.0	-1120.2	-959.8	-825.9	26.0	32.3	2.2	9.6	754.9	1087.9	957.6	816.9
Manufactured Goods	-419.9	-374.8	-487.6	-748.5	-45.8	120.2	189.4	432.4	465.8	254.5	298.2	316.1
Machinery	53.3	-207.0	-605.5	-617.1	-60.9	230.7	602.4	608.9	7.6	-23.8	3.1	8.2
Total	-886.7	-1714.5	-1953.8	-2164.1	-54.3	563.8	995.8	1255.0	940.9	1150.4	957.9	909.3
VOLUME of Intermediary Trade
Food, Beverages	661.7	449.9	603.9	568.2	-242.5	-186.5	-246.8	-242.0	-419.2	-263.4	-357.1	-326.2
Crude Materials	245.4	250.6	349.6	345.2	-36.7	-58.7	-73.4	-116.1	-208.8	-192.0	-276.3	-229.3
Energy	969.4	1354.2	1182.4	954.3	-33.0	-28.5	0.0	-2.4	-936.3	-1325.7	-1182.4	-952.3
Manufactured Goods	1112.5	880.8	1082.4	1311.3	-198.4	-138.8	-255.2	-483.4	-914.0	-742.1	-827.2	-827.9
Machinery	264.9	188.4	696.1	860.5	-226.7	-128.7	-633.2	-719.9	-38.2	-59.6	-62.7	-140.8
Total	3253.9	3123.9	3914.4	4039.5	-737.3	-541.2	-1208.6	-1563.8	-2516.5	-2582.8	-2705.7	-2476.5

The Yamburg project was financed from the budget, so the government is entitled to the income it generated and the subsequent optional rights.

Optional rights mean that after loans are paid back, Hungary will keep the right to import 2 billion cubic meters of natural gas annually for another ten years after 1998, for which Hungarian products will be used for payment. The optional right belongs to the government. We propose that the products exported for barter should be manufactured entirely in Hungary, using domestic labour as well as offered in large quantities. Medicines, processed foodstuffs or vehicles made by the large bus manufacturer "Ikarus" are good examples of possible barter deals; gas imports worth USD 200 million could create sufficient demand for those products. Successful deals could create 30,000 jobs for manufacturers and other assisting partners.

The government has already made a resolution to implement the proposal, however, actual implementation is in delay.

Tourists crossing the borders of Hungary chiefly comprise of "traders" who come to Hungary to sell goods without paying customs duties and taxes. (See Appendix 2 for details.) This practice has an adverse impact on the rate of unemployment and the state deficit, and it deteriorates the competitiveness of domestic products. By provoking extensive vehicle use and offering particularly harmful products for Hungarians, it also increases environment and health hazards. One of the most pressing issues is to restrict the trade of tobacco and alcoholic beverages by tourists. To that end Attachment 1 of Act C of 1995 on Customs, Customs Clearance Procedures and Management needs to be modified.

Stricter customs regulations and higher taxes on products imported by tourists do not violate WTO’s directives and guidelines since they enter the market outside the formal channels of trade.

Hungarians crossed the borders to visit other countries 13.1 million times in 1995. On their way back, they brought goods of significant value into Hungary. Assuming that each Hungarian carries home goods worth net HUF 10 thousand each time they re-enter the country, the total reaches HUF 131 billion. Customs, VAT and other duties paid on those imports should therefore amount to HUF 60 billion. However, only a negligible 2 billion was actually paid into the state budget in 1995.

In fact, however, the value of imports often exceeds HUF 10 thousand; various people enjoy significantly greater benefits from travelling abroad. For instance, 6,000 Hungarian lorry drivers (not to mention the accompanying personnel) crossed the borders of Hungary on their way back home over 400 thousand times in 1995. Assuming they carried goods worth net HUF 30 thousand each time, their imports totalled HUF 12 billion a year, which is a loss of at least HUF 4 billion for the state budget, or in other words, lorry drivers were provided with an allowance of HUF 4 billion. Total loss from non-payment of customs duties and other taxes, therefore, exceeds HUF 60 billion a year. As matters stand now, foreign currency tends to leave Hungary since they are worth more over the borders than the value converted according to official exchange rates in Hungary. Thus, foreign exchange worth nearly USD 1.5 billion leaves the country annually. It is especially sad because it is the loss of state revenues that encourages people to use up their foreign exchange savings outside Hungary.

In recent years the volume of trade described above has showed a downturn proportional to the rate of inflation. Therefore, the above amounts expressed in forints are roughly the same in 1998 as well.

Leaving the current customs system as it is would reduce Hungary’s foreign exchange revenues and worsen the balance of trade. We propose that allowance on imports be provided only once a year for each individual regardless of the purpose of travel. Technically, it would require a separate sheet or a page in the passport to keep records of the allowance already provided. In the event of loss of that sheet or the passport, the allowance cannot be provided for that year. This measure may increase state revenues by a minimum of HUF 5 billion partly as a result of stricter customs procedures, partly because of the growing demand for domestic products, which eventually could cut back on imports. The balance of external trade would also be improved by at least USD 0.5 billion. We propose to use a part of this revenue to help students finance their studies in foreign countries.

Another favourable effect of the proposed measure is that demand for the forint (vs. foreign currencies) would grow, which acts against inflation.

In 1997, nearly 36.6 million visitors crossed the borders of Hungary, of which 25 million came from post-communist countries of the region. They are tourists on paper only, because they carry goods to sell in Hungary at a reduced price since they avoid customs and tax payments. We estimate that even if they bring goods worth net HUF 10-20 thousand each only, imports from the region total HUF 250 billion a year. More severe customs and tax measures are required to cut these imports at least by half, and the remainder half would increase state revenues by HUF 10 billion through customs and tax revenues of 30%. And this is not the only favourable impact: "grey" imports could drop by at least HUF 100 billion, which would push up demand for domestic goods, and consequently, create jobs; foreign exchange savings would stay in Hungary as well, improving the balance of payments this way. Visitors from the East sell articles of low technical quality, and they immediately spend the money they earn on goods (such as video recorders and other electronic equipment) imported from Western countries into Hungary. Doing so, they contribute to the worsening of the balance of payments.

The proposed measures would have favourable impacts on economic development since it is likely that once imports decline, demand for domestic products grows to the same degree, which again increases state revenues through taxes of labour. A fragment of the extra revenues could be used for measures that make Hungarian customs authorities more interested and ensures payment of higher wages. As a result, external balance of payments can be improved by nearly USD 200 million.

The state budget proposal, just like earlier legislation, authorises "… the Minister of Finance to waive the statistical fee and customs clearance fee on imported goods if the goods serve a justifiable purpose of economic necessity."

The legislation leaves room for indirect support for certain players in the market, and because it is not presented in the state budget law, it remains unknown by the members of parliament as well as the public. Indirect support of this kind reduces the transparency of the state budget, makes it difficult to understand it clearly, and therefore, to make the right decisions. Furthermore, it violates the spirit of the state budget act and other initiatives of the government such as reinforcing control over the expenditures of social security funds or independent state funds. Support is granted after a decision-making process full of subjective elements; it leaves enough room for corruption. Nevertheless, in exceptional cases it may be useful and beneficial for the country to provide support of that kind. What we think is necessary is not the complete abolishment of the support but publicity and information about it. Therefore, we propose that the above cited paragraph is added with a sentence that reads: "In exceptional cases, the support granted and the reason for the exceptional treatment shall be listed in the official bulletin of the Ministry of Finance, and summarised in writing every six months and sent to the State Budget and Finances Committee of the Parliament."

As a result, an additional HUF 10 billion is expected to flow into the state budget.

2.7.5. Implementation of Regulations on Safeguarding Life, Health and Environment

Hungary has committed to restricting customs tariffs to meet international standards, an adverse impact of which is that Hungarian products will be disadvantaged to imported goods. To offset at least some of the damage this causes to Hungary, we propose that health and environmental protection measures are introduced to prioritise Hungarian production. (In Japan, for instance, ten thousand or so measures are in force to restrict imports implicitly.)

Products affected by those measures are primarily the ones that can be replaced by more environmentally sound products made in Hungary. Good examples are the asbestos roofing slate, as well as the imports of coal with a relatively high sulphur content and contaminated sulphuric acid. A detailed list of relevant commodities should be compiled as soon as possible.

Article XX (b) of the General Agreement of Tariffs and Trade (GATT) says that parties are allowed to use trade restrictions provided they are necessary to protect the life and health of human beings, animals and vegetation. In addition, Article XX (g) authorises the signing countries to use commercial restricting instruments to preserve their straining natural resources on condition that they restrict the use of internal resources at the same time. (It should be noted that the GATT only allows those measures if they do not discriminate against other countries.)

The European Union also appreciates restricting measures if they do not discriminate other economies. Denmark provided a well-known case by banning the trade of non-returnable bottles due to environmental considerations, and the European Community approved this measure despite objections from other countries.

The embargo imposed on Yugoslavia (Serbia and Montenegro) has caused harm to all neighbouring countries but especially to Hungary. It is common knowledge that economies of the two countries (thanks to the Hungarian minority living in the north of Serbia) were thoroughly integrated. Estimations about the damage caused by the embargo vary: the IMF said it was around USD 2 billion, but other, more realistic sources say it exceeds USD 3 billion including environmental damage and loss of assets. Hungary should be entitled to indemnification for the damage suffered from international sources; just as Hungary is committed to servicing its foreign debt. Meeting obligations is not a question of the size of a country but it applies to every player of the international community. Nobody has the right to deny Hungary’s claim for the remedies.

The EU and other developed countries raised the issue of solving the crisis by granting several billions of US dollars to restore the damage in Bosnia and Croatia. Neighbouring countries could have an indirect compensation in the form of involving them into supplying resources for the countries hit by the war. A similar promise was made to Hungary not a long time ago when Western countries wanted to assist the former USSR by exceptional orders of which other countries of the region could have a share. Orders failed to come in large quantities. The situation is the same now, or even worse because trucks carrying the commodities from the West will go through and pollute the environment of Hungary free of charge. The assistance provided to the former Yugoslav countries is not selfless; it serves the purpose of opening up opportunities for Western countries, making our way back into the same markets even harder. What we can expect is supplying a few material and energy-intensive commodities such as cement, the production of which is uneconomical and environmentally harmful.

The embargo has hit eastern and south-eastern Hungary the most. It would be essential to set up a fund ("Embargo Indemnification Fund") to help those regions of the country. A 5% fee should be imposed on all imports (not including equipment purchased as long-term investment) crossing the borders as of 1 July 1999, which would contribute to the Fund with HUF 100 billion or so in 1999. An additional HUF 20 billion can be expected from VAT revenues. For more information about the proposed Fund, see Appendix 6.

If international organisations are reluctant to recognise the Fund, Hungary should be entitled to the indemnification worth USD 3 billion from the competent bodies of the UN.

Some officials say the government is considering the reduction of the upper ceiling of the VAT rate, which is 25% at the moment. We do not agree with the proposed reduction. Taxpayers should be given a relief from taxes and fees imposed on labour and not those on consumption. If the government reduces the rate of VAT, it will stand less chances to reduce income and other labour-related taxes, which is against economic rationale as well as the government’s policy on taxes.

A survey carried out by researchers of the Budapest University of Economic Sciences has found that companies would not benefit much from the lower VAT rates either. A question in their survey asked 1300 company managers what impacts they thought taxes had on their performance. Their answers revealed that consumer taxes and VAT made the least impact on their performance whereas social security and personal income taxes affected them the most (see Figure 9).

On the other hand, we do not think that the current lower VAT rate of 12% should be increased to 14 or 15% as propesed by the Ministry of Finance. The 12% VAT rate is primarily levied on foodstuffs, an increase would adversely affect Hungarian agriculture and food industry and increase the costs of labour. (There are a few products, though, that should be subject to the higher, 25% rate of VAT. See chapters above for details.) It must be remembered that the VAT rate for foodstuffs is lower than 12% in several EU countries. Keeping the current rate of 12% in Hungary would protect domestic products from imports since the rate of domestic production of those goods well exceeds the rate of imports. (Only 15% of all foodstuffs consumed in Hungary come from imports.) The lower VAT rate is a means of protecting the domestic production in a manner that complies with WTO directives.

Hungary’s future membership is not dependent upon the reduction of the VAT rate. First, VAT rates vary considerably among EU countries themselves; second, EU has not required changes in the VAT as a pre-condition for the membership.

Date		98 Petrol with lead				95 Lead -Free Petrol				Diesel Fuel*				Consumer Price Index
		HUF / litre		%		HUF / litre		%		HUF / litre		%		%
1 January 1993	32.80		100.0		27.80		100.0		22.40		100.0		100.0
1 January 1994	36.90		112.5		28.00		100.7		23.00		102.7		118.8
1 January 1995	41.60		126.8		35.30		127.0		30.20		134.8		152.3
1 January 1996	47.60		145.1		41.30		148.6		34.70		154.9		188.2
1 January 1997	54.00		164.6		48.30		173.7		40.00		178.6		222.7
1 January 1998**	58.74		179.1		54.42		195.8		47.78		213.3		252.8
1 January 1999	64.84		197.7		59.97		215.7		51.40		229.5		278.1

Description	At Hungarian Prices			At German Prices			At Austrian Prices			Extra Revenues
	Price	billion	Total	Price		Total	Price		Total	German	Austrian
	HUF/litre	litre	bn HUF	DEM/l**	HUF/litre	bn HUF	ATS/l**	HUF/litre	bn HUF	prices***	prices***
Petrol*	161.9	1.6	259	1.62	208.98	334.4	11.73	214.57	343.3	75.4	84.3
Diesel Fuel	147.9	2.0	295.8	1.18	152.22	304.4	9.23	168.82	337.6	8.6	41.8
Total			554.8			638.8			680.9	84.0	126.1
Exchange Rate				129.- HUF/DM			18.30 HUF/ATS

Description	1997	1998	1998/1997, %
Motorcars	426.0	628.1	147.5
Lorries and Trucks	235.1	338.3	143.9

Description of Fuel	Import Price	*External Costs*		*Total Costs*
Description of Fuel	Import Price	low	high	low	high
Solid	585.0	226.3	2707.9	811.3	3292.9
Liquid	602.3	138.7	1313.4	741.0	1915.7
Natural Gas	555.5	11.8	111.1	567.3	666.6

Country	over 10 million m³	max. 2000 m³(households)
Austria	-	56.11
Belgium	19.84	47.22
Czech Republic	17.79	13.00
Denmark	19.84	75.96
Finland	17.11	34.21
France	17.11	49.95
Netherlands	18.48	39.69
Ireland	-	47.90
Hungary	15.05	22.86
Great-Britain	13.69	35.58
Germany	19.11	47.73
Italy	20.53	44.48
Spain	19.16	63.64
Switzerland	26.00	51.32
Sweden	-	53.37

Country	Consumer Tax (Imposed on End User)
		Industrial Users (ECU/MWh)	Household Users (ECU/MWh)
Austria		7.4	7.4
Belgium		---	1.4
Denmark		12.2	63.1
Great Britain		1.1	2.2
Finland		2.5	5.7
France		0.2	8.5
Greece		---	---
Netherlands		13.7	13.7
Ireland		---	---
Luxembourg		---	---
Germany		---	---
Italy		14.5	24.4
Portugal		---	---
Spain		0.9	1.9
Sweden			7.0 - 13.5
Hungary		0	0

Opinion on Tax Reforms	Share of Total (%)
Strongly supports reforms	35
Slightly supports reforms	38
Slightly against reforms	9
Strongly against reforms	8
Can’t say / no answer	10
Total	100

Description	Customs Tariffs Number
Mineral Substances (calcium-phosphate- based artificial fertilisers )	ex 2510 20
Mineral Substances Used as Fuels	2701-től 2705-ig, 2709, 2711 21, 2711 12 11, 2711 12 19, (for heating) ex 2711 12 94, 2711 12 97, (for heating) ex 2711 13 91, 2711 13 97, (for heating) 2711 29
Electricity	2716
Mineral or Chemical Fertilisers (formed as artificial fertilisers)	ex 3102. ex 3103, ex 3104, 3105
Insecticides, Fungicides, Disinfectants, Pesticides, etc.	3808
Disposable Diapers	ex 4818 40

	1999	2000	2001	2002	2003	Total
Air Load Fee	2.6	5.22	7.8	10.44	13.051	39.153
Water Load Fee	2.48	4.96	7.44	9.92	12.4	37.2
Soil Load Fee	1.74	3.48	5.22	6.96	8.7	26.1
Total:	7.7	15.4	23	30.8	38.46	115.4

Air Polluting Substances	Unit Rate (Version A) HUF/kg	Unit Rate (Version B) HUF/kg
Sulphur-dioxide	15	30
Nitrogen-oxide	30	60
Carbon-monoxide	15	15
Non-toxic Solid Substances	15	15
Substances Representing 1^st Level Hazard	750	750
Substances Representing 2^nd Level Hazard	75	75

Description of Component	Unit Rate HUF/kg
Description of Component	Version A	Version B	Version C
1.a Chemical Oxygen Need	30	44	160
1.b Biological Oxygen Need	50	73.3	267
2. Extracts from Organic Solvents	600	880	3,200
3. Phosphor	500	733.3	2,667
4. Nitrogen	60	88	320
5. Heavy Metals
5a. Mercury	75,000	110,000	400,000
5b. Cadmium	15,000	22,000	80,000
5c. Chrome	3,000	4,400	16,000
5d. Nickel	3,000	4,400	16,000
5e. Lead	3,000	4,400	16,000
5f. Copper	1,500	2,200	8,000
6. All Salts	1.5	2.2	8
7. Toxicity	0.5 m³/HUF	0.7 m³/HUF	2.7 m³/HUF
8. Heat Pollution	0	0	0

Industry	Water Load Fee billion HUF		Fee Per Unit HUF/m3
Industry	1	2	1	2
Industrial Plants Using Municipal Sewer Canals Households Using Municipal Sewer Canals Other Industries	8.3 2.9 0.8	2.9 6.7 2.4	82.5 12 9	28.3 28.3 28.3
Country Total:	12	12	28.3	28.3

Industry	Water Load Fee billion HUF		Fee Per Unit HUF/m³
Industry	1	2	1	2
Industrial Plants Using Municipal Sewer Canals Households Using Municipal Sewer Canals Other Industries	12.2 4.3 1.2	4.2 9.8 3.4	121 17.6 13.2	41.6 41.6 41.6
Country Total:	17.7	17.7	41.6	41.6

Description	Value of Tax (HUF/kg)
Description	Government Proposal	EPC Proposal
1. New tyres approved by UN ECE (marked with "E"); and imports of old tyres to be restored, the quantity and conditions of which are specified by law	35	35
2. Imports of old tyres restored and approved by UN ECE (marked with "E")	43	55
3. Imports of old tyres to be restored the conditions of which are specified by law	140	200
4. Imports of old tyres	350	800

Description of Materials	Environmental Tax in 1999 (HUF/kg)		Environmental Tax from 1 January 2000 on (HUF/kg)
Description of Materials	Government Proposal	EPC Proposal	Government Proposal	EPC Proposal
Plastic made of or containing PVC	11.50	22 30	12.70	25 32
Combined	11.70	35	15.20	40
Aluminium	5.50	15	5.60	20
Metal (not incl. aluminium)	4.30	4.30	4.30	4.30
Paper, wood, non-synthetic textiles	4.30	2.0	5.60	2.10
Glass	2.10	2.10	2.10	2.10
Other	5.50	25	5.60	30

Declared Capacity	Environmental Tax in 1999 c (HUF/unit)		Environmental Tax from 1 January 2000 on c (HUF/unit)
Declared Capacity	Government Proposal	EPC Proposal	Government Proposal	EPC Proposal
< 120 litres	812.50	1200	1016	1550
120.01-250.00 litres	1462.50	2100	1829	2800
> 250.0 litres	3775	5000	4719	7000
Quantity of Refrigerating Substance	q (HUF/unit)		q (HUF/unit)
< 0.50 kilograms	202.50	280	253.20	400
0.51-2.00 kilograms	362.50	460	453.20	700
> 2.01 kilograms	950	1400	1187.51	1900

Declared Capacity	Environmental Tax in 1999 c (HUF/unit)		Environmental Tax from 1 January 2000 on c (HUF/unit)
Declared Capacity	Government Proposal	EPC Proposal	Government Proposal	EPC Proposal
< 120 litres	3250	4800	4064	6200
120.01-250.00 litres	5850	8400	7316	11200
> 250.0 litres	15100	20000	18876	28000
Quantity of Refrigerating Substance	q (HUF/unit)		q (HUF/unit)
< 0.50 kilograms	810	1120	1012.80	1600
0.51-2.00 kilograms	1450	1840	11812.50	2800
> 2.01 kilograms	3800	5600	4750	7600

Areas of Assessment	Costs and Losses of Income due to Smoking
	minimum value	average value
	billion HUF
Direct Impacts
Loss of income due to sick leave	14	31
Costs of medical care for in-patients	5	5
Allowances for the disabled (1 year total)	6-7	6-7
Sick leave benefit	2-3	5-6
Costs of medical care for out-patients	3	6-7
Subsidies on medical supplies	4	10
Subtotal of Direct Impacts	34-36	63
Indirect Impacts
Loss of income due to death	300-310	300-310
Subtotal of Indirect Impacts	300-310	300-310
TOTAL	334-346	363-373

Statistical number	Description	Tax Rates %	Responsibility
of 221120 (printed material, books, brochures, leaflets and other)	pornographic, sexual and violent features	[25] 50	Publisher (Importer)
of 221500 (postcards, picture postcards, reproductions and other printed products)	pornographic, sexual and violent features	[25] 50	Publisher (Importer)
of 223200 (video recordings on tapes and disks)	pornographic, sexual and violent features	[25] 50	Publisher
of 223300 (data recordings on magnetic tapes and disks, compact disks)	pornographic, sexual and violent features	[25] 50	Publisher (Importer)
of 365041 (cards)	pornographic, sexual and violent features	[25] 50	Manufacturer (Importer)
of 365042 (video stations attached to TV sets)	pornographic, sexual and violent features	[25] 50	Manufacturer (Importer)
of 11343 (renting goods and equipment for entertainment, sports and leisure time activities )	pornographic, sexual and violent features	[25] 50	Service Provider
of 1913 (films distributed in cinemas)	pornographic, sexual and violent features	[25] 50	Distributor (Publisher)
365033 50 00	toy guns	[10] 30	Distributor

Refrigerating Substances Subject To Environmental Tax	Environmental Tax in 1999 (HUF/kg)		Environmental Tax from 1 January 2000 on (HUF/kg)
Refrigerating Substances Subject To Environmental Tax	Government Proposal	EPC Proposal	Government Proposal	EPC Proposal
regenerated products made of or containing CFCs	1748	3000	2420	6000
products made of or containing HCFCs	590	1500	737.50	2200

Product Subject To Environmental Tax	Environmental Tax (HUF/kg)
Product Subject To Environmental Tax	Government Proposal	EPC Proposal
Lubrication Oil	69.90	100.00
Light Fuel Oil / Other Liquid Fuels Meeting the Hungarian Standards	69.90	100.00
Light Fuel Oil / Other Liquid Fuels Meeting the Hungarian Standards but with Over 2% (2.8%) Sulphur Content	4.00	50.0

Statistical No.	Description	Tax Rate %	Imposed on …
222212 00 00	Advertising material, commercial specifications and other	[1] 15	Publisher (Importer)
143	Advertisements	[1] 15	Service Provider
of 143	Advertisements published in newspapers and periodicals	[0,5] 15	Service Provider
of 143	Leaflets, printed materials distributed by mail, other promotion materials and advertisements in papers in which advertisements occupy over 70% of the total space	[0,5] 50
913-5	Structures used for advertisements	[1] 15	Contractor