Tax potential of local budgets: conceptual foundations and modernization directions

Introduction. The formation of the revenue side of local budgets under martial law in Ukraine is one of the key tasks for the effective functioning of local self-government bodies within territorial communities. The fundamental characteristics of local self-governance include capacity, transparency, and resilience. Capable territorial communities, independently or through their respective authorities, should be able to provide an adequate level of public services in healthcare, social protection, education, culture, and public utilities, based on available human resources, financial support, and infrastructure development in the respective administrative-territorial units. However, such functionality requires adequate financial backing, which can be achieved through the effective development of local budgets' tax potential. Purpose. The article aims to monitor the theoretical and practical principles for forming and increasing the tax potential of Ukraine’s local budgets in the current context of wartime risk mitigation. Methodology. The theoretical and methodological framework of the research is based on classical and neoclassical economic theories, fiscal decentralization theory, finance theory, and institutional economics. The study applies the dialectical method of cognition, theoretical generalization and comparison, statistical analysis, graphical presentation, induction, deduction, and other methods. Results. The paper outlines the scientific and practical foundations of tax potential formation for local budgets in Ukraine, particularly under current conditions and in the context of community development stimulation. A definitional interpretation of «tax potential» is provided, including its inherent features and the key determinants of its formation and expansion under martial law. The article presents a review of methodological approaches to identifying and evaluating local tax potential, taking into account international practices. An analysis of tax revenue indicators to local budgets during the reporting period is conducted, highlighting the critical role of personal income tax due to its redistributive mechanisms between budget levels. A forecast trend for property tax revenues to local budgets through 2027 is constructed, revealing a positive trajectory despite fiscal security risks. The study proposes both tactical and strategic measures to improve the tax potential of local budgets in Ukraine. These measures account for realistic fiscal policy, international best practices in local tax administration, and the integration of artificial intelligence technologies into the taxation system to enhance the financial capacity of territorial communities and ensure their sustainable development.