7. Regional spending, tax autonomy and equalization
7.5. Spain
as a matching grant, it does not tie Regions to specific expenditure programmes. The Regions may use the money that is received accordingly as they see fit.
As it stands, the funding of the Regions and Communities is not without some form of equalization. Only the federal government engages in fiscal equalization. For instance, VAT and PIT revenues are not allocated on the basis of the derivation principle. When determining the initial base-line fig- ures, the share of VAT and PIT revenues which accrued to Flanders was even lower than the Flemish share of the Belgian population. The fiscal reforms of 2001 project a gradual increase in the share of the Flemish pie of these tax receipts. Flanders’s share would be made compatible with its demographic strength (per capita), but not with its contribution to the corresponding tax resource (derivation). Furthermore, federal equalization payments of an unconditional nature are made available to regions with a personal per capita income below the national average. At present, Wallonia benefits most from this arrangement. In 2003, such equalization payments repre- sented 13.6 per cent of the Walloon Regional budget (Verdonck and Deschouwer 2003: 107).
In general, the fiscal equalization mechanisms that are explicitly tied to the funding of the Communities and Regions are relatively small. Therefore, the most profound mechanism of fiscal equalization comes in the form of social security and health payments. Social security and health policies (other than preventive health care) are entirely federally controlled. They are distinct from Regional and Community policies which rely on federal fund- ing. Some Flemish actors have repeatedly demanded that at least part of social security (in particularly health care and child allowances, including some aspects of their funding) would be devolved to the regions (i.e. Communities or Regions). Without building in explicit equalization mechanisms, this would strongly reduce existing levels of interterritorial solidarity. Such a change would require the consent of both language groups in the federal parliament and would almost certainly be vetoed by the group of French-speakers there.
regions in the general taxes of the state). A national organic law determines how the resources will be distributed among the regions (also entailing a degree of horizontal equalization – in the wider sense of the word) and to what extent regions may be entitled to a limited degree of tax autonomy (for instance by varying tax rates on certain tax bases). Of particular importance in this regard is the LOFCA (Organic Law on the Financing of the Autonomous Communities). In many respects the size of the regional trans- fers is not only based on need but also on the outcome of bilateral negotia- tions between the centre and each of the regions individually. Bilateralism is not so much a reflection of asymmetry in competencies. In many regards the fiscal and policy asymmetry among the ‘non-fueral’ regions has mostly disappeared. Instead, bilateralism results from a (long-term) lack in the capacity of the centre to develop an accounting system that contains widely accepted needs criteria (Pandiello 1999).
Unlike the position in Belgium, central transfers more often take the form of conditional grants. Central budget laws specify which regional departments should administer the grants, and in so doing implicitly determine the objectives on which they should be spent. Since 1997 the spending and/or tax autonomy of the regions has increased. This was primarily the result of cedinghitherto central tax revenues to the regions.
Cedingtaxes come in many forms (overlapping tax, shared taxes and fully decentralized or regional taxes). Personal income tax could be classified as a shared tax: a third of PIT revenues accrue to the regions and the tax itself is administrated by the centre. Half the regional PIT share is devolved as an unconditional grant, but the other half takes the form of a partially over- lapping tax. Regions can vary their rates on this portion of the tax (an option which no single region has put into practice so far). Since January 2002, revenues from VAT, excise duties and wine tax have also become shared between the centre and the regions, with the regional share com- prising around 35 to 40 per cent of the tax receipts (Ruiz-Almendral 2003).
Finally, the revenues of wealth tax, death and gift tax, gambling tax, gas and electricity taxes and a few other minor taxes entirely accrue to the regions. The regions are also responsible for administrating these taxes and for determining their rates, bases or exemptions. Therefore, we can classify them as regional taxes. Taken together they only contribute to ‘regional tax autonomy at the margins’.
The Spanish regions also operate under some budgetary constraints.
Regional borrowing must be tied to specific investment projects, or must cover transitory needs. Furthermore, the share of financial charges that is linked to borrowing should not exceed a quarter of their current income.
The regions cannot borrow in foreign markets without the authorization of the central government. As part of Spain’s effort to qualify for EMU mem- bership, the regions agreed to an annual debt and deficit ceiling which they may not exceed. In turn, the central government accepted its responsibility
to approve all outstanding regional borrowing operations (including foreign borrowing; see Pandiello 1999: 235–6).
Since regions are primarily funded by central revenue transfers, the cen- tre alone is responsible for equalization. The regional share of the social security and health transfer as well as the PIT revenues are based on a list of weighted variables. Apart from demography, central policy-makers also take geographic (insularity), administrative and fiscal (wealth and fiscal capacity) criteria into account. In addition, regions with a per capita income that is below 75 per cent of the EU average are eligible to aid from the European Structural Funds (objective 1 ESF) and the interregional Compensation Fund (FCI). In this sense, the Spanish government applies the same criteria for paying out FCI funds as the EU. ESF and FCI transfers are tied to specific investment programmes. When deciding how to redis- tribute grants between the regions that qualify for ESF or FCI aid, the Spanish government first applies a formula in which population accounts for 87.5 per cent. Additional parameters (unemployment, net migration and population dispersion) make up the rest. These results are then weighted according to per capita income and insularity. Finally, a Solidarity Fund ensures that the growth rate of all the revenues (own source and transferred) of one region in a given year cannot be lower than 90 per cent of the average growth rate of all regional resources combined (Quebec Commission 2001).
Although all 17 regions have now gained almost identical policy compe- tencies, in the field of taxation a significant form of asymmetry remains.
This asymmetry cross-cuts the dividing line between historic and non- historic regions. It sets Navarra and the Basque Country apart from the other regions (including Catalonia and Galicia).
The ‘foral’ status of Navarra and the three Basque provinces (Bizkaia, Gipuzkoia and Alava) entitles them to an unusually high level of fiscal autonomy. Navarra and each of the three Basque provinces can pass legis- lation on the main Spanish taxes. As a result, they collect more than they spend. The result is a rare form of ‘vertical fiscal imbalance’ in which the regions must partly finance central competencies within their territory (for instance foreign affairs, customs, transport policy or defence). This system of ‘upward revenue sharing’ is also known as the cupo. For instance, in the case of the Basque Country, the central state only regulates VAT, excise duties and income tax of non-residents. The provinces administer these taxes and receive the entire tax receipts (they thus constitute a form of shared taxes; Ruiz-Almendral 2003: 59). Income tax of residents, inheri- tance tax and corporation taxes of residents are entirely regulated by the Basque (provincial) and Naverrese authorities. The tax regime for the Basque Country is different from that of Navarra. Navarra’s fiscal status (Convenio) is constitutionally embedded, while the Basque Country’s (Concierto) is up for renegotiation every five years (to be agreed upon by a
Joint Committee, composed of six central government representatives and six Basque representatives, one from each Basque province and three from the Basque government). As was specified in the previous chapter, the EU has questioned the legality of the Basque and Navaresse tax autonomy arrangements on the grounds that some elements may breach EU competi- tion laws. In light thereof, the Spanish Constitutional Court has also ques- tioned their constitutional nature, in particular their compatibility with the principle of solidarity.