The Hidden Costs of Regulation
We have repeatedly discussed the fact that improving the productivity of the Hungarian economy may depend to an important extent on improving the performance of small and medium-sized enterprises.
However, the economic environment in which businesses operate is influenced not only by the market, raw material and energy prices, or the qualifications of the available workforce, but also by legislation and government intervention.
The present article is not about government regulation that influences the market and, in some cases, distorts it. That is a different issue, and such bad practices should, of course, be eliminated as soon as possible.
What we examine now is what additional burdens may be placed on businesses when an essentially justified regulation is introduced or changed.
These costs often do not appear directly on any single invoice. There is no separate line in the accounts showing how much it cost to create a new record-keeping system, prepare a new return, interpret a regulation, or use an employee’s working time. Yet these are still costs, and for a small business they can even become an obstacle to growth.
To illustrate what hidden costs regulation can create, we will look at waste management and the environmental product fee.
It is clear that our current production and consumption structure generates enormous quantities of different types of waste. If we look at the bins after Christmas, we can see that even a single family Christmas can produce a considerable amount of waste that someone has to collect, treat and dispose of.
As we move towards a world with increasingly scarce energy resources, the idea that the cheapest energy is the energy we do not use becomes particularly important.
A similar principle can apply to waste. Proper collection and recycling of PET, aluminium, paper and glass can save energy and raw materials. Certain types of waste can also be used to produce heat energy with appropriate technologies.
Hungary is also seeking to create a regulatory environment that supports these objectives.
One of the instruments is the environmental product fee, which must be paid to the state tax authority by those defined as liable under the regulations.
We will not describe the detailed rules here. However, the system requires complex record-keeping, calculation and reporting.
In 2024, the environmental product fee generated HUF 17.33 billion in revenue for the National Tax and Customs Administration. Around HUF 2 billion of the amount paid by businesses was subsequently reclaimed.
If we simply divide the total amount paid by the number of businesses, this comes to approximately HUF 19,000 per business per year. Compared with total business turnover, approximately HUF 9 of product-fee revenue corresponds to every HUF 100,000 of turnover.
Of course, one could say that this is merely statistical manipulation. In reality, not every business is subject to the product fee, and the actual burden varies considerably from one business to another.
Nevertheless, the proportions are revealing.
Compared with the more than HUF 25,990 billion in revenue administered by the tax authority in 2024, the HUF 17.33 billion environmental product fee accounted for just 0.067 percent.
In other words, for every HUF 1,000 of revenue administered by the tax authority, less than 70 fillér came from the environmental product fee.
The foundations of the environmental product fee system date back to the mid-1990s. Since then, both the system and its regulations have changed several times.
The question nevertheless remains: could the administration of the system have been made simpler?
Determining and reporting the product fee represents a separate administrative task for businesses. This may be handled by an employee, an accountant or an external specialist.
The tax authority is responsible for checking the product fee reported by businesses. The practice of such inspections also makes it clear that the administrative cost does not arise only on the business side: the state itself must devote resources to carrying out these inspections.
There is no publicly available data, however, showing the total cost to the state of inspections related to the product fee, or how that cost compares with the HUF 17.33 billion collected annually.
In other words, the real cost of the system is not necessarily the same as the amount of product fee paid.
In 2023, another element was added to the system: EPR, or Extended Producer Responsibility.
The principle of EPR originates at EU level, while the details of its implementation have been established in Hungarian national legislation.
Meanwhile, Hungary’s waste-management system has also undergone significant changes with the establishment of a long-term concession system. Under this system, waste-management tasks operate at national level within a unified concession framework.
In 2024, the EPR system generated approximately HUF 220 billion in revenue. This is several times the revenue generated by the environmental product fee.
EPR, however, is not a tax, but consideration for a service connected to the concession-based waste-management system. The two revenues should therefore not simply be added together and treated as tax revenue.
Compared with total business turnover, it can nevertheless be estimated at a broad level that a little more than HUF 1 of EPR revenue corresponds to every HUF 1,000 of turnover.
Again, this is only a macro-level ratio. It does not mean that every business pays the same proportion of its turnover as EPR, since the charge is linked to the quantity and category of the products and packaging concerned.
EPR obligations, however, do not end with paying the fee.
The liable business must register on the MOHU Partner Portal and must also comply with the related record-keeping and reporting obligations.
A business must determine whether the products it manufactures or first places on the Hungarian market, or their packaging, fall into an EPR category.
This is not necessarily simple even for a small business. It is not enough, for example, to know that the business has sold one thousand products. It must also know the material and weight of the relevant packaging.
The quantities of EPR-covered products and packaging must be tracked: what the product is, what packaging it was placed on the market in, what material it is made of, how much it weighs, when it was placed on the market and on what legal basis the obligation arose.
Quarterly reporting is linked to the EPR data. The administration is carried out electronically.
The business must also be able to demonstrate afterwards how and on what basis it calculated the quantities it reported.
EPR is therefore not a one-off registration and not simply another invoice. It represents an ongoing data-management and record-keeping task.
For a large company, this can be incorporated into an established corporate system. For a business employing only a few people, however, the same requirement may mean the time of the owner or an employee, accounting or consulting costs, as well as additional IT work.
If environmental protection is the objective, the question is not simply how much money is collected.
We also have to ask what kind of incentive the system creates for businesses.
Why has it not been possible over the past decades to simplify the environmental product fee system, particularly for businesses where the amount payable is small while the administrative burden may be disproportionately large?
How does the previous product-fee system fit together with the EPR introduced in 2023?
Why was it necessary to establish a national concession system for waste management, and what efficiency benefits has it brought compared with the previous, partly local structure of service providers?
And there is an even more important question.
Does the system really encourage businesses to use less packaging, choose more recyclable materials and generate less waste?
Or does it primarily ensure that they pay the cost of managing the waste that has already been generated?
The two are not the same.
If a business produces the same amount or even more waste but pays the associated fee, the financing side of the system is working.
But if the objective of regulation is to reduce the amount of waste, then it should also be visible that businesses have a genuine incentive to choose less packaging, more easily recyclable materials or more durable packaging.
This is no longer simply a question of taxation or waste management. It is also a question of regulatory effectiveness.
Do lawmakers also examine, in the case of other regulations, their usefulness, modernity and the hidden costs they impose on businesses in the course of their operations?
By: Viktor Szentkiralyi