In Croatia, the fiscal equalization model relies on two main mechanisms: vertical, which is based on revenue sharing, and horizontal, which is based on current and capital donations. Through the system of fiscal equalization, the government sought to equalize the development of underdeveloped areas in Croatia. Granting of special statuses based on various criteria (for example geographical) resulted in a large number of local units with a special status in financing, which led to insufficient transparency and integrity of the financing system. Namely, so far, governments have used tax sharing as an instrument of vertical but also horizontal model of fiscal equalization in order to reduce disparities between local units due to unequal economic development. The new system leads to a greater separation of the balancing mechanisms of the fiscal equalization system from the mechanism of balancing development inequalities. The aim of this paper is to prove that the new model of fiscal equalization more simply and fairly determines the way of distribution of personal income tax revenues, fiscal equalization of local units as a whole, as well as the system of financing decentralized functions. Also, the goal is to show that the new model will reduce the differences between local governments, which are primarily due to different fiscal capacities of surtax and personal income tax collection. The analysis of the practice and experiences of the EU member states in the implementation of fiscal equalization policy has established that the EU does not have a consistent fiscal equalization policy, which differs accross the member states in the method of financing and objectives. Furthermore, the research shows that Croatia is more fiscally decentralized compared to other EU member states. The method of comparative analysis of the two local government financing systems and the calculation of the Gini coefficient of concentration proved that the new model of fiscal equalization is simplified and more transparent and that fiscal inequalities among local governments in the Republic of Croatia have been mitigated.