Montero's crusade against Madrid's "tax dumping"

MadridMaría Jesús Montero has long been waging a crusade against Madrid's "tax dumping." The First Vice President and Minister of Finance has made no secret of her support for discouraging this practice, and this Friday, within the framework of the presentation of the new regional financing modelShe has brought it up again. "It's important to set limits and [approve] mechanisms to prevent tax evasion," she said.

Shortly after, Montero stated that she is already considering legal avenues to prevent the autonomous communities from lowering transferred taxes (for example, through substantial deductions) to the point of eliminating them, which ultimately leads to a race to the bottom among the regions, but also "unfair competition," in Salvador's words. The Community of Madrid, for example, benefits from the so-called capital city effect and applies an aggressive tax-cutting policy that acts as an economic magnet to the detriment of other regions.

Specifically, the Minister of Finance has hinted that she "doesn't mind" following the path taken with the wealth tax ceded to the autonomous communities in the case of inheritance and gift taxes. In the case of the former, the Spanish government approved a tax on large fortunes that, in practice, imposes a minimum tax rate where it is 100% exempt, as is the case in Madrid and Andalusia. Montero has also opened the door to doing the same with the property transfer tax and stamp duty. However, among the range of options is also the possibility of leaving "a minimum tax" on currently ceded taxes in the hands of the central government, or directly limiting by law the ability of the autonomous communities to offer tax reductions.

Montero has also criticized the fact that some regions base their tax policy on tax cuts, relying on other territories to sustain revenue collection. She has linked this precisely to the regional financing model and the fact that the central government provides extra resources. "It makes no sense for us to be making an effort to provide more resources to the regions and then for them to lower taxes on their share, thus failing to collect a significant portion of certain taxes," Montero lamented. Although she spoke in the future tense—these limits on tax dumping would be applied later—this was already raised in the negotiations with ERC for a new system and, to some extent, appears in the proposal presented this Friday, according to sources close to the negotiations. Of the additional resources contemplated in the new model, Madrid would receive an extra 2.555 billion euros.

How so? According to the same sources, corrective measures are being introduced through vertical equalization (how state resources are distributed); horizontal equalization (between autonomous communities); and a review of the composition of the tax basket within the financing model, which now includes new taxes such as the wealth tax. These equalization mechanisms primarily determine the position of the autonomous communities in terms of contributing to and receiving from the financing model. Madrid, which will be the largest contributor, will be the second largest recipient. Vertical equalization, on the other hand, establishes the threshold from which the remaining territories must reduce their per capita funding disparity.