Junior coalition party Eesti 200 will propose scrapping the car tax during budget negotiations with the prime minister, Eesti 200 Chairman Kristina Kallas told ERR on Wednesday.
The move comes after Prime Minister Kristen Michal (Reform) announced on Tuesday that the budget is €800 million better off than initially expected and the income tax rise in 2026 could potentially be scrapped.
Eesti 200 said it will propose the cancellation of the car tax, abandoning the additional increase in personal income tax, and raising the wages of teachers, rescue workers, police officers, and others.
Kallas said she agrees with Michal’s statement that the car tax is a failed tax and noted that the same issue has been discussed within Eesti 200 following the release of the budget forecast.
“We will propose to the prime minister that reversing the car tax also be considered. In a situation where the budget deficit has not increased, and we’ve managed to get the budget in order and under control, where people have contributed to national security through taxes, perhaps now is the right time to revisit this national security tax package,” she said.
“But a prerequisite for this is that we must implement wage increases, because people’s purchasing power has fallen significantly,” Kallas added.
Increased borrowing
However, removing the tax would increase the amount of borrowing the state needs to cover defense spending, the education minister acknowledged.
“But our borrowing capacity has significantly improved, because we have fixed the budget. Our budget is more or less in balance, and we can borrow funds for the defense spending that we need to make,” Kallas said.
The impact on the state budget would be about €120 million, she estimated.
This means that together with canceling the income tax increase, which would have a €200 million impact, and public sector wage increases, which would take about €100 million, the total impact on the state budget would exceed €400 million.
Kallas said it will still be necessary to make cuts over the next couple of years.
“The state budget, the key indicators or core expenses, are actually under control. What is increasing our deficit, what we need to borrow for, is actually defense spending,” Kallas said.
Asked how realistic it is that coalition partner Reform Party would support the proposal, Kallas replied that the party also senses that in order to support people’s purchasing power and get the economy going again, the national security tax package needs to be revisited.
“The people of Estonia have contributed to the state’s national security, to rising defense spending, and to purchasing defense equipment. And now it’s possible to partially pause that contribution—it no longer needs to be done on such a large scale,” Kallas said.
Scrapping tax not possible
Kallas’ tone on lowering taxes and scrapping the car tax was different in an interview published yesterday in Tartu Postimees. She said neither was possible.
Responding to comments from Isamaa chairman Urmas Reinsalu, she said: “Reinsalu continues this theatrical game of lying, talking about how under his leadership taxes will be brought back down, how the car tax will be canceled… That’s not possible! We can’t maintain defense spending at five percent while also providing free higher education and raising pensions and teachers’ salaries every year,” Kallas said in the interview.
Car tax introduced this year
The car tax was introduced in 2025 and it was expected to generate around €100 million.
However, earlier this summer in a bid to drive up support for the government, the coalition introduced a discount for all families with children.
Under the new rule, families would receive €100 discount on the tax per child.
This was expected to drop the revenue from the tax by around €25 million a year. The government initially introduced the policy without knowing how much it would cost the taxpayer.
This article was updated to add additional comments from Kristina Kallas.
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