Montero outlines a financing plan with greater resources and a stronger role for the regions in personal income tax and VAT.

MadridMore resources and greater participation of the autonomous communities in key taxes such as personal income tax (IRPF) and VAT are two of the main pillars of the proposed financing model for the autonomous communities under the common regime (which includes all communities except the Basque Country and Navarre, the chartered communities), presented this Friday by the First Vice President and Minister of Finance, María Jesús Montero. The proposal involves updating the current system and comes after an agreement with ERCAnd, incidentally, with the Generalitat – in exchange for supporting Salvador Illa as president, an agreement was reached with the Republicans to implement a new model that would take into account Catalonia's "uniqueness." The proposal aims to move beyond the current model, designed in 2009 and awaiting updating since 2014. Montero acknowledged that this is one of the "most complex" challenges of the legislature and immediately urged against falling into the trap of "territorial favoritism." The Treasury has clearly always worked to ensure that, despite the negotiations with ERC, where they are satisfied with the outcome, the proposal is not interpreted as a model tailor-made for Catalonia. "There is no single model for every autonomous community," the Finance Minister asserted.

However, Montero's words have been to no avail because the PP, which governs in most regions, and also within the PSOE, with the president of Castilla-La Mancha, Emiliano García-Page, have rejected the proposal outright, even though they are unaware of the fine print – the regions will receive the details in a Policy Council meeting; the ministry has two months to draft a final document.

The Spanish government needs at least the approval of the parties in the investiture bloc for the new model to pass when it reaches Congress, something the Treasury expects to happen before the summer. However, some of these parties have also expressed reservations. starting with JuntsFor now, these are the details of a new system planned for five years, which would come into effect in 2027.

How will the funding be calculated?

The regional financing system aims to ensure that regions receive resources based on their social spending needs and that basic services are guaranteed on equal terms. This includes healthcare, long-term care, and education. The proposed new system maintains the calculation of these funding needs using adjusted population, a concept derived from weighting the actual population with various variables. The weighting of each criterion (all of which add up to 100%) is crucial in determining how much each region should receive.

Under the new model, the criteria have changed: the population according to the municipal register will account for 30%; the equivalent protected population will represent 38% and will be divided into 20 age groups instead of the previous 7. The educational criterion will be divided into two: inhabitants up to 17 years old and inhabitants between 18 and 24 years old (in this case, the weight of displaced university students will be taken into account for the first time, benefiting regions such as Catalonia and Madrid). The other criteria are social services (here, the population over 65 years old is broken down for the first time, which benefits the most aged regions, as well as the unemployed without benefits); surface area; population dispersion; insularity; and fixed costs, an element introduced for the first time to provide support to smaller communities.

Some academics had suggested that, given the new social realities, especially in regions like Catalonia, the adjusted population calculation should include factors such as the cost of living (prices), immigration, and tourism—issues that are not currently included. "I am convinced that each region would prefer certain criteria to carry more weight," Montero acknowledged. For example, the funding needs of regions like Catalonia or Andalusia, with higher population density, are not the same as those of Galicia or Asturias, with larger aging populations and more dispersed areas.

Where will the resources come from?

Regional funding is derived from the revenue collected by the autonomous communities and the central government through direct and indirect taxation. Under the new model, this funding structure would change. Initially, the autonomous communities would have greater taxing power over personal income tax (IRPF) and VAT, meaning they would retain a larger share of this revenue.

They assume 55% of Personal Income Tax (IRPF) revenue (up from 50%) and 56.4% of Value Added Tax (VAT) revenue (also 50%). Conversely, they retain 58% of excise taxes (alcohol, gasoline, and tobacco). In addition, they retain 100% of the revenue from taxes such as inheritance tax, property transfer tax, and stamp duty, which they already had. However, the list now includes wealth tax, bank deposit tax, gambling tax, and waste disposal tax. All these taxes will now contribute to regional funding, something that did not happen before (these resources remained with each region). The Ministry of Finance estimates that the changes will provide an additional €16 billion for the regional system.

How are these funds distributed?

The biggest headache comes when it's time to distribute the money that goes into the common fund. Until now, different funds operated, making the model almost unintelligible. Now, the ministry is simplifying it through horizontal and vertical leveling mechanisms.

The horizontal mechanism will determine what each region must contribute to the other regions, and subsequently receive. This is where the so-called "inter-regional solidarity" comes into play: the fact that the wealthier regions will ultimately be net contributors will remain unchanged. Under the new model, each region must reach 75% of the adjusted average per capita resources of all regions. For the ministry, the key is to eliminate the current disparities in per capita funding between regions.

And what is the role of the State?

Then the State will come into play through vertical equalization. This equalization aims to further reduce the difference in resources per capita between regions and will involve contributing 5% of the revenue from Personal Income Tax (IRPF) collected by the State (based on the latest available data, this amounts to approximately €5 billion) in addition to an extra transfer. The key to this contribution (totaling around €19 billion in the first year of the model's implementation, a significant increase from the €13 billion disbursed in 2023) is to help reduce the gap between the regions (by up to two-thirds) and the wealthiest region, Madrid.

What about the ordinality?

One of ERC's complaints was that Catalonia received far fewer resources than its potential tax revenue. For example, in 2021 it was the third-highest contributor per capita (€3,153 per person), but the sixth-lowest recipient per capita (€2,848). Maintaining this scale is essential to upholding the principle of ordinality. In Catalonia's case, the new model ensures this principle is maintained, as confirmed by Montero. However, this does not mean it will cease to be a net contributor to the system. This will not be the case in all territories. Although a final picture is not yet available, Madrid, for example, is currently the leading contributor, but with the new model, it will become the second-largest recipient. Conversely, smaller regions will move up the rankings once resources are equalized. The Treasury does not want to focus on ordinality – it will not be legally protected – but rather on ensuring that the resources received guarantee equal coverage of basic services and prevent underfunding, an issue closely linked to the debt accumulated by some regions. It should be noted that currently there is a gap of €1,500 per capita between the worst-funded and best-funded regions (Murcia and Cantabria), which Montero aims to halve with all the adjustments.

Secondary Adjustments

But to fully finalize the model, some secondary adjustments have been introduced. Some are optional, while others only affect specific autonomous communities. For example, to ensure that no territory receives fewer resources than it does under the current model, a closing mechanism called [the following is proposed] status quo This essentially amounts to a €400 million transfer from the central government to guarantee this principle (as planned for the first year of the model's operation). It will affect Cantabria and Extremadura, two of the best-funded regions, which would lose resources under the new model.

Furthermore, regions that wish to do so may request to receive a portion of the VAT revenue generated by SMEs with their tax domicile within their territory. This particularly benefits Catalonia, which has the highest number of small and medium-sized enterprises. A climate fund of €1 billion is also being created, to be distributed among the Mediterranean regions—those most vulnerable to climate change—based on population-adjusted criteria. They will receive one-third of the funds, with the remainder distributed among other regions. Another change is that regions that wish to do so will have access to resources in real time, as the current system of advance payments and settlements, which currently results in payment delays, is being modified. The aim is not only to expedite payments but also to establish a "shared treasury system" where revenues arrive simultaneously at the central and regional administrations.

Where are the singularities?

Considering only the central government's contribution, the new model represents an additional €20.975 billion, to be distributed upon its implementation in 2027 (this is an estimate). Catalonia would receive €4.7 billion, making it the second-largest beneficiary after Andalusia (€4.846 billion). The third-largest beneficiary is the Valencian Community (€3.669 billion), followed by Madrid (€2.555 billion). It's important to note that the model is based on economic forecasts with sky-high tax revenues. "70% of the €21 billion goes to regions governed by the PP. They will have to explain why they don't want it," Montero reiterated. But in the case of Catalonia, these resources would be supplemented by funds to cover the financing of non-homogeneous responsibilities, such as the Mossos d'Esquadra (Catalan police force), which the Catalan government and the central government will have to negotiate bilaterally at a later date. These are the "unique characteristics" that the Catalan government has defended, but also ERC. Finally, one issue that will remain blocked is progress on tax management, particularly regarding personal income tax, by the autonomous communities.