Why does Isla want to end Madrid's tax dumping?

MadridCrossfire between Salvador Isla and Isabel Díaz Ayuso over tax dumping. The Madrid president did not hesitate to respond to the Generalitat's accusation that Madrid practices unfair downward tax competition. And the PP closes ranks with her: "They are attacking the community that contributes the most resources to the common pot," said the economic leader of the Popular Party, Juan Bravo, in a press conference this Monday. In fact, following the statements from Isla this weekend at the ARA, Ayuso has stated that Madrid contributes "70% of the common fund" of the common regime financing system (what is known as the guarantee fund). In this sense, according to the latest data available from the Ministry of Finance corresponding to the year 2023, that year the fund was funded with 116,508 million euros. 70% would mean that Madrid would have contributed more than 80,000 million, although its contribution was 17,201 million.

In any case, this is not the first time that the debate on how Ayuso applies the tax autonomy with which all common regime communities have been endowed over ceded and own taxes has been brought up. In the White Paper on Tax Reform In 2020, experts were already proposing the need to move toward tax harmonization to end this downward tax competition, especially around some ceded tax items such as the wealth tax and the inheritance and gift tax. The ERC (Republican Revolutionary Party) and the PSOE (Spanish Socialist Workers' Party) also agreed to this that year, but the pact never prospered. Now it's Isla who has taken it upon herself to reignite it. However, different motives lie behind the Generalitat's position.

The weight of the capital city effect

From the outset, the Generalitat makes decisions that contrast with those of the Community of Madrid, which year after year has boasted of approving tax cuts that have generally benefited high incomes (affecting taxes such as wealth tax or the highest brackets of personal income tax). Among the latest modifications, the 50% discount stands out.

On the other hand, Isla, although she has also agreed to some tax cuts (personal income tax for incomes under €33,000), has opened the door to increasing other taxes such as the property transfer tax for large holders (in Madrid, the tax has a lower rate than the Catalan one and~) of the Generalitat is that with this practice by Madrid, we are entering a spiral that is unsustainable for the rest of the territories because they do not have a key element: the effect of being the capital of Madrid. high incomes and assets Thus, although it loses money due to its cuts, the impact is neutralized. Madrid: capital, knowledge economy, and tax competition the impact of this capital status effect, and asks whether "as a result of the advantages it [the capital status effect] brings, it should not abandon a fiscal strategy that, thanks to this effect, harms other communities." The report also asks whether "a more territorially neutral exercise of capital status would eliminate part of the framework on which Madrid's comparative advantage rests."

Inefficient?

"Lowering taxes does not harm other autonomous communities," Bravo asserted this Monday. This statement contrasts with other reasons why the Generalitat wants to end Madrid's tax dumping, which Isla himself, in fact, put forward this weekend: "The autonomous communities closest to Madrid are losing economic weight [...]; they are affected by this way of competing."

Different studies have also examined this possible indirect effect on neighboring territories. One of the strategies has been to see if Madrid acts as a vacuum cleaner, that is, if its downward tax policy attracts people and companies from other areas of the state. A 2021 report by academics Clara Martínez, David Agrawal, and Dirk Foremny concluded that, at the very least, 6,000 large fortunes were transferred between 2011 and 2015 for this reason.. It should be noted that tax cuts in the region have been championed by all the PP regional governments.

The IVIE report, which also focuses on this mobility, concludes that one of the impacts of this mobility in favor of Madrid "limits the contributions of those [high incomes] on which [tax] progressivity to the communities of origin can be based."

According to Diego Martínez, professor of applied economics at the Pablo Olavide University of Seville, beyond putting figures on these movements, it is also necessary to focus on "efficiency" when thinking about territorial distribution. "It is not efficient for people to move for purely fiscal reasons," reflects Martínez, who points out that in Madrid, for example, costs are skyrocketing due to overcongestion, while other communities are losing citizens and, therefore, too much labor, which impacts activity or productivity.

Ideological clash

Beyond the economic issues, there is an ideological clash behind it, which has not been raised for the first time and which the PSC, but also the PSOE, have used to differentiate themselves from the PP and, in particular, from Ayuso's PP. The Prime Minister of Spain, Pedro Sánchez, himself has on occasion embraced the accusation of "fiscal dumping" and the "hole" it represents for the public coffers. Other left-wing parties have also joined in: "The lowering of taxes for the rich in the autonomous communities must end [...] Break Spain," affirmed the Minister of Labor and visible face of Sumar, Yolanda Díaz, this Monday.

On the other hand, the PP remains clear about its model. "I encourage [other autonomous communities] to do so because those that have done so, like Andalusia, have seen that they have gained more activity, employment, and businesses, and are collecting more," the PP's economic chief stated this Monday. In the case of Andalusia, when Juanma Moreno (PP) came to power, he didn't hesitate to jump on the tax cut bandwagon and compete with Madrid. Last year, however, the Andalusian government itself acknowledged that it was reaching "the limits" of its public spending capacity.

In the case of Madrid, tax cuts also have an impact on public spending, but they don't affect everyone equally. According to the same IVIE study, in 2017 alone, Madrid lost €4.1 billion due to tax cuts applied to transferred taxes. "The consequence [in Madrid] is a low level of per capita spending, which doesn't have the same implications for those who benefit most from tax cuts and other taxpayers. For the former, who tend to have high incomes, the consequences are lesser because they make little use of public health, education, or social protection services. But for the latter, who are the majority and are the majority and are lower, they suffer the consequences more," the report concludes.