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The subject of the study is the impact of fiscal decentralization on the financial capacity of local budgets. The purpose of the article is to analyze the problematic aspects of practical reformation of local self–government on the principles of decentralization of power and the search for ways to improve the formation of the financial independence of the united territorial communities. Methodology of work – the position of the theory of fiscal federalism, which reflects the complex schemes of relations between budgets of different levels, the concept of fiscal decentralization. Balancing financial resources at the level of local self–government bodies to finance their delegated authority. Proposals for strengthening the financial independence of local self–government bodies are developed. The results of the work – grounded the necessity of launching a new model of financial provision of local budgets and intergovernmental fiscal relations, which envisages the process of distribution of functions, rights, financial resources and coherence between central and local levels of government and administration. Changes in the formation of local budget revenues are analyzed. An estimation of the level of budget decentralization is conducted. Practical recommendations for solution of problem issues are offered. Conclusions – Budget decentralization should contribute to increasing the financial capacity of local budgets, local self–government's interest in expanding the tax base, and raising local responsibility for regional development, which requires changes to the budget legislation on the distribution of national taxes between the linkages of the budget system. One of the ways of providing financial support to local authorities is to define a new mechanism for redistribution of VAT received in the regions. This tax should be in the joint use of different levels of government, which will significantly affect the increase of local budget revenues.