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. Last Updated: 07/27/2016

Senators Expected To Snub Tax Plans

The Federation Council is on Wednesday to take up tax legislation submitted by Prime Minister Mikhail Kasyanov, but politics watchers say the senators are in a truculent mood and will put off any decisions until the fall.

Kasyanov said Saturday he was optimistic that the watered-down version of his government's tax package that had been approved by the State Duma would be accepted by the senators of the upper house of parliament.

But half of those senators are governors from the nation's 89 regions, and the other half are legislative speakers who are often in the governors' pockets.

And those governors are smarting: Their colleagues in the Duma have just overridden their opposition to a law that will give President Vladimir Putin, if he chooses to sign it, the right to fire governors, disband regional legislatures and even launch a reform of the national parliament to drive out the governors permanently.

Adding insult to injury, the Kasyanov government's draft plans for the 2001 federal budget call for transferring more money out of the regions and to the federal government. Now the federal budget takes about 52 percent of tax revenues and the regional governments about 48 percent; the 2001 draft would take about 60 percent for the federal budget.

"The [Federation] Council is in a state of absolute shock because of the law on its reformation that has been imposed upon it, and it will not approve the tax laws Wednesday," predicted Sergei Markov, director of the Center for Political Studies.

"The governors will go for corporate revenge," agreed Yury Korgunyuk, an analyst with the INDEM think tank. "Such a spit in the face is unforgivable."

The tax package the Federation Council will consider Wednesday includes:

? a 13 percent flat income tax that would replace the existing progressive income tax brackets of 12 percent, 20 percent and 30 percent;

? a consolidation of several payroll taxes into one simpler, lower tax;

? excise tax hikes on beer of about 10 percent, on wine and liquor of about 5 percent and on cigarettes of about 50 percent;

? a threefold hike in the gasoline tax;

? a lowering of the excise tax on natural gas sold within the Commonwealth of Independent States from 30 percent to 15 percent; and

? a value-added tax that remains at 20 percent but drops to 10 percent for a number of food products and children's products.

Regional leaders have already lobbied against one key tax initiative of the government f the full elimination of the turnover tax f and won. The government was forced to back down in negotiations with the Duma and accept a 1 percent tax on businesses' turnover (as opposed to tax on profits).

Not all the governors are against the package. Samara Governor Konstantin Titov, recently re-elected, said Monday in remarks reported by Interfax that the tax package is "very good" and must be approved.

But even President Putin's special representative to the Federation Council, Vyacheslav Khizhnyakov, said Monday that he doubted the package would pass.

"The government says that those laws are aimed at the improvement of the economy in the regions, but heads of the regions think differently," Khizhnyakov was quoted as saying by Interfax.

Robert Devane, managing director of the Moscow-based investment firm Renegade Capital, said in an interview conducted by e-mail that the governors and heads of regional legislatures feel they are threatened with extinction and may hold the tax and budget legislation hostage.

"It is also evident that the Putin regime isn't almighty and that sufficient opposition can be mounted to beat back some of its more aggressive initiatives.

"That suggests that Federation Council members, along with major business leaders, will be tempted to launch a major assault on the KGB-esque Kremlin power core in an effort to avoid the fate of the dinosaurs," Devane wrote.

The government calculates that the tax changes now before the Federation Council, if adopted, would bring in another 100 billion rubles, or $3.6 billion.

First Deputy Finance Minister Sergei Shatalov, who was a lead author of the new tax laws, told Izvestia the draft 2001 budget will be submitted to the Duma at the end of August f and is built on the assumption of getting that extra revenue.

"It will be a complete dead end if, after the budget is prepared, the tax package is still not approved and the government has to go back to using the current [tax] legislation," Shatalov said.

Shatalov and other observers also said they doubted the Duma would be able to override a Federation Council rejection of the tax program.

To prepare for Wednesday's showdown, Cabinet members have started a public relations offensive for their program f particularly to defuse allegations that the 2001 budget will suck money out of the provinces.

"I think everyone today realizes that a tough, transparent budget that is balanced is a principle without which finances cannot operate on the federal or regional level," Kasyanov said Saturday in televised comments during a government meeting.

"If we manage to ensure that not one region suffers f then I am convinced that our proposals will be supported by the Federation Council," he said.

Labor Minister Alexander Pochinok was also talking to the regions Monday at a news conference for regional mass media. He said calculations could eventually show that the regions will win from the overall package f because more revenues will come in overall in response to lower taxes and because the federal government will take over some regional spending items.

Pochinok said that in 2001, welfare payments for children, the handicapped, the elderly and veterans, as well as law enforcement salaries, will all be paid out of the federal budget and not local budgets.

Shatalov, in remarks reported by Interfax, said Monday this would mean that 56.8 percent of all collected taxes will be transferred to the federal budget and then 5 percent returned back to the regions to fund those new federal expenses.