TALLINN — Tallinn Mayor Edgar Savisaar started a tax war Wednesday between the capital city and the Estonian government, saying the municipality would scuttle a 1 percent sales tax hike if the state will reduce the income tax by 2 percent.

On Tuesday the Tallinn municipal government proposed establishing a 1 percent sales tax and boat tax to revive of city’s declining revenues, but received negative reactions from the Estonian Taxpayers Union and the national government. Savisaar then agreed to forgo the tax hike on the condition that the state will lower the income tax back to 18 percent, as it initially was before the crisis.

Minister of Finance Jürgen Ligi isn't taking the tax deal Tallinn Mayor Edgar Savisaar's instigated lightly.

The national government isn’t amused. In an interview with Äripäev published Thursday Minister of Finance Jürgen Ligi said that bargaining with taxes is revenge toward the government and Savisaar’s “we increase our deficit if you increase yours” attitude lacks financial logic. Ligi calls the Tallinn 2010 budget draft one big mess, as it’s not reasonable to consider a loan a source of income.

Ligi told Äripäev that according to law it is not possible for Tallinn to take a loan, as the city has crossed the 60 percent debt limit. The mayor’s statement calling the sales tax as a “luxury tax” provoked Ligi to say it’s a “luxury tax” because it pays for the city’s luxurious lifestyle as the salaries of public officials remain the same and no jobs are cut.

Annika Vilu, a finance ministry spokeswoman told Baltic Reports that the ministry does not consider taxes are a subject of bargaining, therefore the ministry will not negotiate with the Tallinn municipality on the issue.