Development of democratic principles in European countries also stimulates decentralization processes in the sphere of state control by relegating ever greater part of public affairs ma-na-gement to local government institutions and enhancing thereby their significance in state control. The European local government charter states thet local gover-nment institutions make a basis for any democratic system.Local government means that local authorities, within the limits established by law, have the right and capability to manage and control a part of public affairs in the interests of local population, taking the whole responsibility. Local authorities have the right to accomplish the functions delegated by central or regional authorities, at their own discretion and taking into consideration local conditions. These statements also refer to the economic sphere and their realization would allow an increase in the economic effectiveness of local government.The decentralization process, based on the mentioned principles, takes the shape of the so-called fiscal decentralization in the economic sphere. The fiscal decentralization is conceived as enhancement of financial independence of local authorities, by delimiting the functions of the local and central authorities in the public economic sector, and by allocating appropriately financial resources to pursue these functions. The economic foundation of such decentralization is enhancement of the efficiency of the public economic sector. A centralized supply of standard wealth disregarding a specific character of individual regions of a country and a variety of the needs of social groups conditions its inadequacy to the needs of society. In this case, decentralization of the public sector will stimulate economic efficiency by establishing more favorable conditions to supply public wealth such that meet the consumers’ needs best.Realization of fiscal decentralization in the public economic sector of Lithuania and its correspondence to the principles of the European charter on local government are considered in this article. Legal basis of fiscal decentralization in Lithuania are discussed. Dynamics of budget expenditure of Lithuanian municipalities and their shares in the national budget as well as in the gross domestic product and dynamics of three main municipal budget income structural parts-tax income, non-tax income, and subsidies in the period of 1999-2004 is analyzed. The realization of the conception of local taxes in Lithuania and other countries is discussed.Article 9, part 3 of the European Charter of Local Self-Government  states that „part at least of the financial resources of local authorities shall derive from local taxes and charges of which, within the limits of statute, they have the power to determine the rate“. However, Lithuanian laws do not give the definition of local taxes. All taxes, included taxes were attributed to municipalities (except land tax since January 1, 2003) are administrated by the State Tax Inspectorate. Taxes attributed to municipalities (except income tax for residents) may be regarded as local but the rights of municipalities to influence the amount of taxes are weak, they can only reduce tax tariffs or exempt from them on the account of budget. Municipalities are more free to influence tax on market places (municipalities can increase or reduce tax tariff by 70 proc.), national land and water recourse rent (municipalities can determine tariff of rent within the limits of 1,5-4 proc. depending on the land value, which is not rented by auction) and companies real property tax (municipal councils determine property tax of fixed amount). However, it does not play an important role in municipal budgets, because the essence of the problem is not the fact that municipalities have weak rights to determine the amount of attributed taxes, but the fact that these taxes comprise a small share of municipal budget.In future the conception of local fees and charges will have to be legalized and developed with the introduction of new local taxes such as real estate tax of natural persons, estate tax of legal persons, luxurious real estate tax of natural persons, and other. Maybe, laws should limit their maximal amount. One of the major local taxes could be the property tax with a progressive tax rate the lower bound of which, i.e., the minimal size of property from which this tax is to be calculated, would be defined by law. Instead of dividing tax it would be more reasonable to introduce two-rate taxes. It is closely connected with the overall reform of state tax system because liberal tax system towards the persons with high incomes is the main hindrance for local fees and charges and financial independence of municipalities, because state revenues are insufficient. Tax system should be based on progressive tax structure by increasing tax burden for persons with high income, but not for persons with low or average income. Some steps are already undertaken on the Government level. Upon the order of the Minister of finance a working group is set up to prepare the draft of the conception of local taxes.