Montero vs. Junqueras: the viability of singular financing at stake

Barcelona / MadridThe dazzling event for Salvador Illa's investiture was the agreement for Catalonia to have a new, unique financing model that would involve collecting all taxes, starting with personal income tax. Aside from the PSC (Spanish Socialist Workers' Party), the PSOE (Spanish Workers' Party) also endorsed the agreement in a federal committee, the guarantee that ERC used to submit the pact to a vote of the grassroots—who endorsed it with a narrow majority of 53.5%. Although on paper the pact stipulated that the Catalan Tax Agency (ATC) would already be collecting personal income tax by next year, over the past few months this provision has not only changed, but overall compliance with the pact has been left up in the air. The clash between ERC and the Ministry of Finance has become evident in recent weeks, leaving Salvador Illa's government in a bad light, having to balance the balance. What separates the two parties right now? Why doesn't what ERC is demanding fit with what the head of its portfolio, María Jesús Montero, wants?

The investiture agreement between the Socialists and Republicans stipulated that, with the new financing model, Catalonia would begin collecting all taxes and establish a solidarity quota to contribute to the rest of the State. To begin implementing the pact, the Government began sizing the ATC to incorporate human and technological resources that should allow the agency to manage personal income tax, the tax that Catalonia was supposed to collect in 2026, but which has finally been postponed until 2028. In parallel, Esquerra has taken a step forward by presenting this Friday, and on its own, a bill to provide legal protection for the collection of ATC and also extend it to the rest of the autonomous communities. And this is where the first clash with the Ministry of Finance has become evident.

The ERC argues that without approving a legal framework, the steps the Catalan government is taking to prepare the Catalan Treasury to collect personal income tax are futile. The Republicans, in fact, complain that María Jesús Montero does not want to transfer this collection because it would mean touching "the very core of the State," in the words of Oriol Junqueras. The Republicans' bill not only allows Catalonia to manage this tax, but also extends it to the communities that request it. In fact, they propose amending three state laws to give it a legal basis: the Organic Law on the Financing of the Autonomous Communities (LOFCA), the law regulating the financing system of the autonomous communities under the common regime (22/2009), and the law on the transfer of taxes to Catalonia (16/2010). However, Montero does not share the Republicans' approach.

The most significant tax

Personal Income Tax (IRPF) is not just any tax. It is the most important tax in the State due to its revenue collection, which has direct consequences for the resources distributed through the common regional financing system, and which should have been updated in 2014. It should be noted that of the regional portion of the IRPF, only a portion is retained by the territory (in the case of the %) and then transferred to the common pot that feeds the system. Furthermore, a complete decentralization of the IRPF (Personal Income Tax) would also affect the resources of the State, which currently controls the other 50% of the tax. This is why this has always been a thorny debate for the Treasury, to say the least. In fact, the discussion about granting greater fiscal autonomy to the regions has been dragging on for years, not only in institutions but also in academia.

The Ministry of Finance is unclear about its intentions regarding the transfer of this tax—in the past, Montero has publicly advocated moving toward a federalization of the tax system and has opened the door to tax harmonization. In any case, the Ministry of Finance's starting point is the agreement reached with the Catalan government within the framework of the Generalitat-State Bilateral Commission last July, but not the proposal presented this Friday by ERC. In fact, the document resulting from the Generalitat-State meeting spoke of "promoting" legislative changes so that the ATC (Spanish Tax Agency) would "progressively assume responsibility for managing personal income tax." Therefore, it did not explicitly mention revenue collection.

The ball is now in their court. To begin with, they could veto ERC's legislative proposal for budgetary reasons, as recognized by the Constitution (it affects a tax and, therefore, the resources available to the State). He has 30 days to decide. If he doesn't put obstacles in the way, the initiative will be voted on in the full Congress when it's ERC's turn.

Sources from this department emphasize only that it is necessary to proceed "progressively" – ceding a tax entirely means handing the key to the cash register, that is, the resources, to a region – and that modifying personal income tax involves touching "very important laws" that absolutely require the approval of the Congress of Deputies, something the Plurinational Party does not currently have. "It must please everyone," reiterate the same sources, who prefer not to comment on a timeline.

Pending the Treasury proposal

If the regulation ultimately does not go ahead, ERC is considering another avenue that should serve as a first step toward approving this legal basis so that the ATC can collect personal income tax. The comprehensive reform of the regional financing model that María Jesús Montero must present should entail modifying the Lofca (Spanish Tax Law), and this is where Junqueras's party sees a gap in also including the legal change so that the autonomous communities can manage income tax, according to sources within the party. However, two other laws—the ones that ERC had incorporated into its bill—would have to be amended for this collection to be effective.

The Treasury's intention is to present a new proposed model before the end of the year. However, sources within the ministry point out that despite being closely linked to the transfer of taxes such as personal income tax, these are "parallel" projects. "Work is underway," indicate sources within the ministry, who already warn that the intention is for it to be "viable" for all autonomous communities. Republican sources believe that the fact that María Jesús Montero is a candidate for Andalusia complicates any kind of progress in this area. "She won't have anything signed with ERC" to run, the same sources opine. This Saturday, Montero asserted that it is a "lie" that the Spanish government wants to benefit Catalonia more with new funding, just as it was that the FLA settlement only helped the Generalitat: "We forgive Andalusia more than other territories."

However, there are those who amend this thesis: "Whether she is a candidate or not, [María Jesús] Montero would not propose a model that would be negative for Andalusia, but neither would she propose a model that would be negative for any other region." Sources close to the vice president assert that it is difficult to find someone "more in tune" and "sensitive" than her to negotiate a unique model that would, in turn, provide greater capacity when it comes to managing taxes such as personal income tax. "She knows the financing model thoroughly and is willing to negotiate [...]. If anyone thinks they have an easier time negotiating with someone other than her, they are mistaken. It's a misinterpretation," the same sources reiterate. However, pressure from Esquerra, for now, has not moved the Ministry of Finance. But María Jesús Montero's position leaves Salvador Illa's government in a difficult position, as he has repeatedly stated that he will comply with the investiture agreement.

This Wednesday, the president of the Generalitat himself tried to downplay the clash with the Spanish government and asserted that Montero is an "asset." This week, however, the Government sided with ERC when he claimed that his goal was to ensure that Catalonia collected 100% of personal income tax. This isn't the first clash the Catalan socialists have had with the PSOE. At the meeting of the Generalitat-State Bilateral Commission in July, The principle of ordinality defended by the PSC fell from the agreement for a singular financing model. and it was simply included as one of the things that Catalonia defends, but without the Spanish government assuming it.