On February 1, the Armenian government introduced a bill to the National Assembly which marks a new step in the development of its state structure, as it is intended to radically increase the role of local municipalities. The local self government bodies in Armenia have so far been very week, with limited powers and influence. In particular, this is obvious in the weakness of their financial capacities. In 2010, the integrated budget of the local communities is set to 88.3 billion drams (US$232 million), which is just 9.4 percent of the central government budget. The local municipalities are expected to collect only 25 billion drams through their own revenues, the remaining 63 billion being transferred from the central government. In addition, almost half of this transfer, 30 billion drams, will be allocated to the capital city of Yerevan, which harbors one third of the country's population. Not surprisingly, the local municipal governments are usually poorly organized, poorly paid and short of qualified specialists. Until recently, the central government was the only body eligible for collecting taxes, but has gradually passed the collection of land and property taxes to municipalities.

By presenting the local tax bill to the National Assembly, the government took a first real step towards providing a more active role for the local municipalities and to increase their role in the society. In its initial form, the bill suggested the introduction of a new category of local taxes, which the local communities would establish and collect themselves. Ten such taxes were proposed, including sales tax, tax for hotels, and taxes for misuse of agricultural lands. The government presented the bill as an initial move in its efforts to strengthen and reform local self-government, which is also supported by the program of cooperation between Armenia and the European Union.

The government had been cautious to introduce these changes, which constitute a novelty for Armenia. The bill (which in fact constitutes a package implying amendments to several laws) was first presented to the parliament in January 2009, and a second time in April. In both cases it was withdrawn for amendments after being discussed at the committee level only.

This time, the bill was discussed at the parliament plenary session and received mixed reactions. Opposition deputies expressed concerns that the new taxes might result in an unnecessary increase in the tax burden, and that it could even become a new tool for political or economic pressure. Such concerns were raised especially given the fact that the ruling Republican Party of Armenia dominates not only the central government and the National Assembly, but community councils as well. Moreover, the opposition expressed suspicion that the new taxes could be used by the community heads to initiate a new round of property redistribution in the country in favor of the current ruling elite. The opposition’s concerns were shared by many representatives of the parties Bargvach Hayastan (Prosperous Armenia) and Orinats Yerkir (Country of Law), which are the junior members of the ruling coalition.

The government preferred to step back under the pressure of such criticism. In the final version of the bill introduced in the parliament two weeks later, only four types of local taxes were excluded from the original ten. On February 22, the parliament passed the bill allowing the introduction of local taxes in the first reading, with the list containing land tax and property tax as obligatory taxes, along with hotel tax and tax for parking, which are established by the decision of the local municipalities. The specific conditions and the rates of the later two taxes are still to be determined by special laws.

The fact that the government relaxed its initial proposals on the local self-government issue demonstrated that the ruling majority acted with caution and sought to avoid increasing tension, not only between the ruling coalition and the opposition, but also among the ruling coalition parties. The adoption and implementation of local taxes in Armenia could become a major subject of dispute in the next parliamentary elections to be held in 2012. This is highly dependent on the political situation and future government measures on the issue.