Spanish government takes on tax reform

MADRIDIf there is a pandora box in government, it is taxation. In the Spanish case, it has not been opened for years, or at least not completely. Now, however, the executive, and specifically the Ministry of Finance, has two commitments on the table that change the situation: tax reform, on the one hand, and a new regional financing model, on the other. Although the two issues are far from being closed, they are part of the Spanish government's to-do list for fiscal matters for 2022.

With the tax reform, the central executive seeks to bring Spain's taxation levels "closer to the average of the surrounding countries", as stated in the budget plan for 2022 sent to Brussels last October. In fact, Spain has a historical problem with tax collection and has been at the bottom of Europe for years, only ahead of some Eastern countries (such as Estonia, Latvia, Bulgaria or Romania) and a tax haven such as Ireland. To reverse this situation, the Ministry has put on the table tax measures that would affect environmental taxation (such as road tolls), corporate taxation, the taxation of the digital economy, the application and implementation of asset harmonization or the taxation of emerging economic activities, as shown in the budget plan. All this, in order to guarantee "the medium-term sustainability of the welfare state".

For the time being, the executive has limited itself to talking about the broad outlines. The Ministry of Finance intends to specify its plans once the committee of experts, headed by Jesús Ruiz-Huerta, the creator of Zapatero's fiscal balances, presents its tax reform proposal. If everything goes as planned, the final document will be presented in February. It will have been ten months of work since the group was formed last April, with a pandemic in the middle that "has not made things easy", as the committee itself points out from. Marathon online meetings and "cultural differences" in the understanding of taxation –economists and jurists converge in the group of experts– have meant that for now the committee has not had completely agreed on any issue. To this, two resignations have been added along the way, as a result of internal discrepancies: those of the professors Carlos Monasterio and Ignacio Zubiri.

But what can we expect from this document and how will the executive apply its recommendations? First of all, it should be remembered that the proposal will not be binding and that, therefore, the government will be able to do whatever it wants. In fact, there is no hope in the committee that it will be transferred literally to the Official State Gazette. Nor is there a concrete timetable. Sources in the Ministry of Finance speak of "progressive changes" in tax matters throughout the year, while Pedro Sánchez has reiterated this Monday that the reform will come only when "economic growth is consolidated".

As for the proposal itself, the group of experts' text will not result in a dissection of all taxes and how they would have to be modified to raise more –the Ministry of Finance has already anticipated that it will not be a "tax revolution" that affects all layers of society– but rather on how to face the new challenges to the tax system, such as digitalisation, online shopping or green taxation. For this reason, the group of experts has not only fed on the proposals made by the regional governments, trade unions or employers' associations, among others, but has also glanced sideways at moves by the European Union and the OECD. As for classic taxes, the proposal will address small changes on corporate tax, the possible harmonisation of taxes such as the wealth tax –in fact, the PSOE agreed with ERC the creation of a group of experts in this regard in exchange for ERC's support to the State budgets of 2021– and the income tax brackets, but everything suggests that, for example, the inheritance and gift tax will not be affected. In addition, any modification that implies a tax totally or partially devolved to regional governments will have to be then negotiated with them.

Adjusted population, the first step

In fact, it is the regional governments that take centre stage in the other major debate: the reform of the regional financing model. After the proposal of adjusted population that the Ministry of Finance sent to the regions at the end of December, the regional governments have the whole month of January to make their suggestions. "It is necessary to look for a minimum common denominator and not to make a model tailored to each region," say sources from the Ministry of Finance, who are confident that their initial proposal will not receive major changes.

The concept of adjusted population, which the Generalitat rejects from the outset, is the first step in reforming the model and defines the system with which the resources for regional financing are distributed according to criteria such as population or spending on health or education, for example. The weighting of each of these criteria is decisive in determining how much each autonomous region receives, and the new system introduces important changes.

Once this is resolved, however, there are other controversial points, such as simplifying and understanding the funds on which the model is based: the global sufficiency, the guarantee of fundamental public services and convergence. Understanding them is a "heroic" task, experts acknowledge. In this sense, however, the Spanish government has not set a timetable beyond the duration of the legislature to carry out a head-to-toe reform of the system. In the meantime, the only consensus is that the current model, which should have been revised in 2014, no longer works.