The aim of the paper is to analyze the impact of the tax reform, which was implemented from 2017 to 2019, on the entire tax system and especially on the activities of local self-government units. Secondary data were used. The tax system is described by looking at the general features, legal framework, principles, goals and structure. The analysis of the tax system is crucial for understanding the broader picture of tax functioning in Croatia. After the analysis of the tax system and its structure, the analysis of the tax reform follows. Furthermore, the initial situation is defined, followed by the reasons for which the reform was necessary. The tax reform from 2017 to 2021 is presented in five rounds. A detailed review of the tax reform circles follows the conclusion on the visible effects of the implemented reform. In order to determine the connection between the actions of local self-government units and changes within the tax system, it is necessary to observe the determinants of local self-government units through the description of the characteristics of budget beneficiaries, the regulatory framework and the way of financing. Finally, the impact of the reform on the cities and municipalities is described in more detail, and then a conclusion is drawn on the validity of the implemented measures, an assessment of how successful they were, which problems remain unsolved and which challenges lie ahead in the future. The most important goals of any tax system are to narrow the room for maneuver for the appropriation of income on which no tax has been paid and to take into account the level of the tax rate so that, as such, it does not become a dissuasive element. Taxpayers must have confidence in a tax system that is stable, without frequent changes and whose application does not require expertise. Frequent additions and changes require exceptional dedication from taxpayers, but are often necessary for the progress of the entire community. The tax system must be ready for a timely and adequate reaction, because every change has a significant effect on the individual. Local self-government units represent the lowest level of management, and any change within the legal regulations has a direct or indirect impact on its operation.