Ruiz Almendral, Violeta

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Taxes, transfers and spending in Spain: the regions and the centre seek the right balance

Universidad Carlos III de Madrid e-Archivo

BY VIOLETA RU IZ  ALMENDRALF e d e r a t i o n s  volume 2, number 2, february 2002Taxes, transfers and spendingin Spain: the regions and thecentre seek the right balanceSpain is in the process ofdecentralizing its fiscal system to givemore power and responsibility to theAutonomous Communities. (*) In July 2001 the central governmentand the Communities of Spain agreedto expand and broaden the scope ofwhat the Spanish call “ceded taxes.”This was the second phase in a reformthat started in 1996. The main objective of that originalreform was to make the Communitiesas responsible for the money theyraised as they already were for themoney they spent — thus decreasingwhat in fiscal federalism literature isknown as “vertical fiscal imbalance.”(This occurs when the revenues of oneorder of government do not correspondto its expenditure responsibilities.Frequently this imbalance takes theform of central government revenuesexceeding its legislative and executiveresponsibilities while the constituentunits’ revenues are inadequate for theirresponsibilities.) Until the 1996 reform, ceded taxes hadbeen taxes levied by the centralgovernment whose yield was “ceded”or granted to Communities accordingto the amount raised in eachcommunity. In effect, ceded taxes werea kind of transfer, by which some ofthe central government’s taxes werecollected and administered by theCommunities. The 1996 reform contained a numberof important provisions. First, thePersonal Income Tax became a cededtax – albeit only partially. Second, thecentral government gave toCommunities the power to regulatesome aspects of these taxes. TheCommunities gained control over suchmatters as tax brackets, tax rates andsome tax credits. Centre still has ultimate authorityThe means of transferring this authoritywas what the Spanish call “adelegation of legislative powers” fromthe central government to theCommunities. Unlike the constitutionsand established practices of most otherfederations, the Spanish Constitutionpermits this sort of “delegation.” Butbecause the central government onlydelegates powers that are still inprinciple its own, it can both controlhow the Communities exercise thosepowers and, perhaps more important,revoke them at any time it chooses. It is generally agreed, however, that ifthe central government were to actuallytry to exercise its power of revocation itwould create great stress on therelations between the two tiers ofgovernment. For this reason, the newpowers of Communities regardingceded taxes are seen by most as beingvirtually permanent. Following the reform, the yield fromceded taxes still accrues to eachCommunity on the basis of taxes paidby its own taxpayers. But now, should aCommunity exercise its new legislativepowers, the yield will be the result ofthe Community’s own taxing autonomy.What until 1997 had been a form oftransfer became a form of tax sharing. The 2001 reform expanded theCommunities’ legislative powers andadded to the list of taxes that could beceded to them. There are a great many different kindsof ceded taxes, ranging from thepersonal income tax to death and gifttaxes to gambling taxes. Depending onthe tax, the yield totally or partiallyaccrues to Communities, which may ormay not take on legislative powers,and may or may not be in charge ofthe tax’s administration. In fact, the powers that Communitieshave vary so widely, depending on thetax, that in some cases the ceded taxstill operates as a mere transfer (forinstance, in the case of the valueadded tax). In other cases, the broadscope of the powers granted makesthe ceded tax something very similarto an autonomous tax (for example, inthe case of gambling taxes). From dictatorship to a gradualfederalizationWhen Spain developed a democraticconstitution in 1978, following thedeath of Franco, it provided for theformation of the distinctly Spanishentities known as AutonomousCommunities. Regions could opt for astatus similar to that of constituentunits in other federations – or theycould choose not to assume thatstatus. What happened in practice wasthat all of the regions in Spain decidedto assert their autonomy and thewhole country is now divided intothese Communities. The Constitution does not define Spainas a federal state. Actually, it does notdefine the form of the state at all —* Note: Spain is divided into 17 Autonomous Communities. What is said in the discussion in this article does not apply to the Basque Country andNavarra which, according to the Constitution, have special status (i.e. more autonomy), implying different taxation powers than apply to the rest of theCommunities. The commentary in this article also does not apply to the two Autonomous Cities (Ceuta and Melilla), since they do not have legislativepowers. The Canary Islands also have a special tax regime in some aspects (i.e. no Value Added Tax), but it does not differ greatly from the generalsystem, so they do have most ceded taxes.F e d e r a t i o n s volume 2, number 2, february 2002after Franco’s centralized government,consensus on this matter was anythingbut easy to obtain. But it is generallyagreed that, given the broad scope ofits decentralization, Spain is in practicea federation. In the years immediately following1978 the Communities were financiallydependent on transfers from thecentral government. They did not levytheir own taxes to any significantextent. This was not a problem, in partbecause during that period manySpaniards tended to regard theCommunities with certain distrust. Infact, voters rejected Community effortsto establish their own taxes — ashappened in the Community ofMadrid, in 1987. But, as time passed, the Communitiesgradually gained more authority andtheir financial needs grew. This resultedin a gradual expansion of the transfersystem, and more financiallydependent Communities. Soon, debates about the Communities’fiscal responsibility became one of themain characteristics of the relationshipbetween the central and Communitygovernments. By the end of theeighties, some Communities wereready to play a more active role intaxation policy. In fact, they establishednew taxes. The central government did not alwaysaccept such taxes and was unwilling togive up its de facto taxationsovereignty. It challenged some ofthese new taxes in Spain’sConstitutional Court. The war on thesharing of taxes had been declared andit became obvious that there was aneed to reassign taxation powers. Thefiscal reforms of 1996 and 2001 were away to buy peace between the centreand the regions and to get theCommunities to take greaterresponsibility both for spending and forcollecting revenue. Many doubtwhether that purpose has yet beenachieved.The reforms have not yet deliveredthe hoped-for resultsAutonomous Communities are giventhe option to choose whether theywant to exercise their regulatorypowers. This is coherent with the so-called “optional autonomy system” inthe Spanish Constitution, by whicheach Community may decide whatpowers and authorities it wants to takeon. But the way that this option has beenstructured – and the fact that thecentral government still guaranteesCommunities lump-sum grantsallocated on the basis of what theyhave historically received – serves tocreate a strong disincentive forCommunities to use their new taxationpowers.Proof of this disincentive is the factthat, since 1997, Communities havemainly used their powers to create newfiscal benefits – assuring that they willbe seen by taxpayers as the “FairyGodmothers” who offer services tocitizens without asking for money inexchange, while the taxing role of the“Wicked Stepmother” is played by thecentral government.So although there has been areassignment of taxation powers, andCommunities now have more roomthan they ever had for designing theirown taxation policies, they still preferto rely mainly on transfers from thecentral government. In the year 2000, conditional andunconditional transfers still representedroughly 60% of the Communities’ totalrevenues while the yield derived fromceded taxes represented 25%.However, if we take into account thatmost ceded taxes act as “transfers”(where the Communities do notexercise any regulatory powers on thetax rates), transfers from the centralgovernment still represented, in theyear 2000, the overwhelming bulk ofthe Communities’ total revenues. Giventhat the Communities spend about40% of total expenditure – whilecollecting only about 15% of therevenue — many observers argue thatthere is something askew in the fiscalsystem of Spain.If one of the reasons for the reformwas to increase the Communities’ fiscalresponsibility and make them moreaccountable to taxpayers for the moneythey spend, it has failed to attain itsgoal. It remains to be seen whether thelatest increase of Community taxationpowers will help to change thissituation. Most knowledgeable observers thinkthat it will not, since the incentiveproblems just described remain largelythe same in the laws putting the newagreements into practice.The distribution of taxation powers in the Spanish ConstitutionThe constitution gives Autonomous Communities taxation powers (sections133 and 157) but the central state can limit them through a special law(section 157.3). The central government made use of this power as early as1980 by approving the Autonomous Regions Finance Act. This law imposessevere limits on the creation of new taxes by the Communities. The mostimportant is the prohibition of double taxation, which prevents autonomoustaxes from being similar to central state and municipal taxes. Since these twobodies had already established taxes on most of the imaginable sources ofrevenue, little tax room was left for Communities. Moreover, theConstitutional Court has interpreted these limits broadly, making it almostimpossible for Communities to invent new taxes. Therefore, despite constitutional provisions that guarantee Communities boththe power to establish taxes and financial autonomy (section 156.1), thelimits established by the central state have led to a system where taxationpowers remain mostly in its own hands.

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Taxes, transfers and spending in Spain: the regions and the centre seek the right balance

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