7. Regional spending, tax autonomy and equalization
7.1. Switzerland
Of the Western European federations, Switzerland offers the largest degree of regional (and local) tax autonomy. The Swiss constitution stipulates that the federal government may raise income tax, but only up to 11.5 per cent on the income of the general population. Similarly, the federal government is not allowed to tax profits of corporations above 9.8 per cent of their total net profits and to tax corporate capital above 0.0825 per cent on the capital and reserves of legal entities (Article 128 SC). The constitution also earmarks roughly a third of the above-mentioned revenues for regional consumption and requires that a part of it shall be used for fiscal equalization purposes.
Each of the above-mentioned taxes is specified as ‘Federal Direct Taxes’
(FDT). There are more shared taxes, but the federal government’s share is 80 per cent or higher for three of them. This almost turns these taxes into exclusive federal taxes (the tax on games and entertainment counts as an exception as 75 per cent of its revenues accrue to the regions). VAT is the only exclusive federal tax of significance, but its rate is constitutionally fixed.
Within the total pool of regional and local revenues, personal income-tax receipts contribute 46 per cent of all tax revenue, whereas the tax on profits and capital generates a further 10 per cent. Property taxes, taxes on capital gains, gifts and inheritance tax, and a non-VAT sales tax further spice regional and local revenue coffers. Cantonal and local governments receive a total of 26 billion Swiss francs in shared taxes or specific grants (these could be federal grants benefiting the cantons or municipalities, or cantonal grants benefiting the localities). In contrast, own-source revenues add up to the much higher figure of 73 billion Swiss francs (both figures for 1999 – Quebec Commission 2001).
As a result of their high level of tax autonomy, average per capita regional tax receipts vary substantially from one canton to another. Such differences may result from discrepancies in per capita income and, as a corollary, Table 4.6 Different tax sources and their corresponding tax type
BEL ESP** GER ÖST SUI UK
Personal Partially Partially Shared Shared Concurrent Partially income overlapping overlapping and shared overlapping*
Corporate Partially Unilateral (C) Shared Shared Concurrent Unilateral (C) income overlapping
Sales or Shared Shared Shared Shared Unilateral (C) Unilateral (C) VAT
*Only for Scotland; **Autonomous Communities, except Basque Country and Navarra; C⫽Centre.
Source: Braun et al. 2003: 25 and Quebec Commission 2001.
regional per capita tax capacity. For instance, the regional per capita income in Zug is more than double (2.2) the regional per capita income in the Jura (Dafflon 2001: 8). Regional variations in tax receipts may also stem from inter-cantonal tax competition. For instance, in order to attract investment from foreign or Swiss employers, Swiss cantons have entered into a down- ward spiral of competition as far as taxing business profit is concerned. In the seven French-speaking cantons of Switzerland, business profit taxes decreased by 11.14 per cent between 1985 and 1999. The reported decreases were as high as 28 per cent in Berne and 32 per cent in the Jura (Dafflon 2001: 26). With the exception of Berne, the fiscal burden on business profit and capital in French-speaking Switzerland is still above the Swiss average, making the German-speaking cantons more attractive to firms in terms of their business tax regimes (Dafflon 2001: 26).
Despite the considerable regional tax autonomy and the presence of par- allel tax systems, several measures ensure that public-service standards are comparable.
First, it must be remembered that Switzerland largely follows a cooperative federal design in aspects that are not related to fiscal federalism. Regional or local tax autonomy does not necessarily imply regional or local policy autonomy. As in Germany, the legislative onus lies with the centre, but the cantons and communes carry an important implementing (and funding) responsibility. For instance, in environmental policy the federal government enacts most of the legislation, the cantons coordinate and supervise the implementation process and the municipalities implement the policies.
About two-thirds of the environmental expenses are made by the munici- palities. A part of these are financed under the form of conditional federal or cantonal grants (Dafflon 2001: 13).
Second, despite the presence of parallel or concurrent taxes, some harmo- nization of the direct taxes takes place, in particular with regard to the defi- nition of the tax base. However, in the view of Bernard Dafflon, downward fiscal competition in the field of business taxation can only be stopped if the federal government receives a right to determine the upper and lower limit (or the range) within which cantonal business tax rates could vary (Dafflon 2001: 28). One could fear that in the present context of open tax competi- tion, cantons will engage in deficit spending, that is, cantonal tax rates might be too low to cover regional expenditure needs. The federal constitu- tion does not prescribe tight budget constraints; cantons are only prohibited from borrowing money from the central bank. Despite such fears, regional deficit spending is relatively rare. Several cantonalconstitutions impose bal- anced budgets, only accepting temporary deficits in the event of a recession.
Furthermore, a beneficial tax regime is not the only factor which people or firms take into account when settling somewhere. A canton’s budgetary health (and often the corresponding quality of its services offered) may play an equally important role. Finally, in most cantons, citizens can trigger a
referendum on fiscal matters, that is, also on the most suitable taxation/
expenditure mixture. The referendum provides an ad hoc but powerful instrument for constraining fiscal policy initiatives of federal, regional and local governments in office. It can prevent the cantons from engaging in deficit-spending as a result of reducing their tax rates too much (Braun 2003:
33; Dafflon 1999: 276).
Third, although cantons differ substantially in size, average national income, geography and expenditure needs, there are well-developed policies of equalizing fiscal burdens. Without substantial vertical fiscal imbalances, such efforts primarily take the form of horizontal equalization (broadly defined). Equalization policies do not seek to equalize fiscal effort or expen- diture levels across the federation, but they aspire to a minimumquality of public service delivery throughout the federation. This should be achieved without widediscrepancies in regional tax effort. To that purpose, grants are made available, which take one of three types.
A first group takes the form of conditional federal grants to the cantons.
These grants consist of a minimum transfer component that is equal for each of the cantons, and a variable transfer component that is higher for cantons with a relatively low financial capacity. The capacity to raise taxes is calcu- lated on the basis of four measures: (1) per capita national income in each of the 26 cantons (as an estimate of potential per capita cantonal tax revenue);
(2) per capita tax burden; (3) per capita tax revenues of the cantons and com- munes; and (4) an estimate of cantonal expenditure requirements. The last component takes the huge discrepancies in regional population density into account as well as the relative share of agricultural land in the mountains or the plains (Dafflon 2001: 31).
A second type of equalization takes place when distributing the regional pie of shared tax receipts. Here, cantons must take differences in regional financial capacity into consideration. For instance, only 57 per cent of the regional share of FDT receipts is distributed on the basis of origin. The for- mula for redistributing the remaining 43 per cent takes divergences in finan- cial capacity into account. Similar arrangements apply for the distribution of half the cantonal proceeds of the withholding tax and customs duties on fuel, that is, two further shared taxes, and more than half the regional share of earnings from the Swiss National Bank (Dafflon 2001).
Finally, cantons with above-average financial capacities pay above-average contributions to federal old-age pensions and to federal disability pension schemes. Cantons with a per capita contribution to FDT below 80 per cent of the national average are allowed a reduction in their contributions to some federal family allowance schemes.
Of all three schemes, the shared tax revenue component entails the largest form of equalization. Federal conditional grants and cantonal contributions to federal social security programmes follow next. None of the above schemes establishes a form of horizontal equalization in the narrowsense of
the word. The third form of equalization could be interpreted as a cantonal grant for federally regulated social security programmes. Horizontal equal- ization only occurs indirectly as regions which contributed less into the scheme may also stand to benefit more in terms of above-average social security receipts.