Fiscal decentralization:

How to allocate resources and tax-raising

power

September 2012

Contents

1. Distribution of fiscal power between central

government and autonomous communities (AC).

2. Relative situation of Catalonia’s financing system

resources

3. Structure of transferred taxes

4. Normative power over taxes

5. Management power over taxes

6. Current situation

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1. Distribution of fiscal power between central

government and ACs. Foral and common models.

Foral system (Basque Country and Navarra).

- ACs collect and manage all taxes

- With capacity to modify their legislations (specially direct taxes).

- Payment of a quota (“Cupo”) in compensation of central government

expenses in their territory.

General system:

- Collection of taxes distributed between central government and ACs

- Limited tax power for ACs

- Central government transfers financial resources to the ACs in order to

cover their spending needs

Foral model provides a much higher level or resources than the

common model (the Basque Country has 60% higher financial resources

per capita than Catalonia).

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2. Relative situation of Catalonia’s financing system

resources

Catalonia’s situation as a result of the financing

system is 1,1% below the mean.

Regional gap for Catalonia considering relative

consumption prices rises up to 8,8% below the mean.

In terms of GDP Catalonia is the 4th in the ranking

while in terms of Gross Disposable Household

Income (considering purchase price parity) is the 8th.

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2. Relative situation of Catalonia’s financing system

resources

Financing model results - Year 2010

Indices relative to arithmetic average (according to the distribution of population)

Index Ranking Index Ranking Index Ranking

Community of Madrid 133,3 1 94,4 12 90,7 15

Balearic Islands 122,9 2 99,8 9 95,3 11

Catalonia 118,5 3 98,9 10 91,2 14

Aragon 114,8 4 113,4 5 118,3 4

Cantabria 114,0 5 122,8 1 127,2 2

Principality of Asturias 105,2 6 112,9 6 113,5 7

La Rioja 102,3 7 117,6 3 108,4 8

Castile & Leon 101,2 8 117,1 4 125,0 3

Valencian Community 93,9 9 93,5 13 93,4 13

Galicia 90,5 10 111,6 7 115,1 6

Castile - La Mancha 86,6 11 104,4 8 117,1 5

Region of Murcia 84,0 12 93,1 14 94,3 12

Andalusia 81,0 13 94,5 11 97,9 10

Extremadura 76,4 14 119,4 2 137,5 1

Canary Islands 42,1 15 88,6 15 104,0 9

ACs average 100,0 100,0 100,0

Autonomous

communities (ACs)

Fiscal capacity

Total homogeneous

resources

Resources

considering relative

consumption prices

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2. Relative situation of Catalonia’s financing system

resources

Gross Domestic Product and Gross Disposable Household Income (per capita)

Indices relative to arithmetic average (according to the distribution of population)

Index Ranking Index Ranking

Community of Madrid 138,9 1 119,0 3

Basque Country 138,8 2 126,9 2

Chartered Community of Navarra 129,1 3 127,1 1

Catalonia 115,4 4 103,7 8

La Rioja 110,5 5 106,4 7

Aragon 108,9 6 111,1 4

Cantabria 103,2 7 108,1 6

Castile & Leon 98,5 8 110,9 5

Principality of Asturias 94,8 9 102,3 9

Balearic Islands 90,0 10 97,4 11

Valencian Community 86,7 11 90,4 14

Galicia 86,4 12 96,4 12

Canary Islands 85,8 13 97,4 10

Region of Murcia 80,8 14 80,8 17

Andalusia 74,5 15 82,0 16

Castile - La Mancha 72,4 16 88,8 15

Extremadura 71,8 17 92,9 13

ACs average 100,0 100,0

Source: Funcas (2010)(1) Considering purchase price parity

Autonomous communities (ACs)

per capita GDP per capita GDHI(1)

100% transferred taxes:

- Inheritance and gift tax

- Wealth tax

- Property transfers tax

- Special tax on means of

transport

- Tax on retail sales of

hydrocarbons

- Gaming taxes

Equal to 11,2% of non

financial incomes in Catalan

government’s 2012 budget

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3. Structure of transferred taxes

Partially transferred

taxes:

- 50% Income tax

- 50% VAT

- 58% special taxes

(hydrocarbons, tobacco

and alcohol)

Equal to 63,1% of non

financial incomes in

Catalan government’s

2012 budget

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3. Structure of transferred taxes

Non-financial budgeted income - Year 2012

Million euros

Million € % on total

Taxes 18.450 75,8

Partially transferred taxes 15.357 63,1

Income tax1 7.843 32,2

VAT 5.550 22,8

Special taxes2 1.964 8,1

Totally transferred taxes 2.728 11,2

Special tax on energy 311 1,3

Special tax on means of transport 114 0,5

Tax on retail sales of hydrocarbons 390 1,6

Inheritance and gifts tax 198 0,8

Property transfers and DLA 1.221 5,0

Wealth tax 240 1,0

Gaming taxes 254 1,0

Own taxes 365 1,5

Transfers from central government 1.247 5,1

Other 4.636 19,1

Total non-financial income 24.333 100,01 Autonomous government share2 Specia l taxes on tobacco, a lcohol and hydrocarbons

100% transferred taxes. Common system ACs’ normative power

covers exemptions, tax rates and bonus. Limited potential

collection. Fiscal competency between ACs has pressed tax

rates down.

Partially transferred taxes. Limited normative power over income

tax and no normative power over indirect taxes. Reduced

capacity to set configuration aspects of those taxes with more

potential collection.

Own taxes. (in Catalonia, tax on commercial centers, touristic

tax, water sanitation tax) ACs can create own taxes under tight

restrictions. Moreover, central government has been lodging

appeals to ACs’ attempts to establish new taxes. In practice, it is

difficult to design a new tax.

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4. Normative power over taxes

ACs manage only 100% transferred taxes. These are taxes very

related to real estate market, therefore its collections has

dropped in the last years.

Central government manages partially transferred taxes:

- Annual cash advances’ system with every AC. Two years later,

a final settlement cancels differences → distortions in ACs

managing of financial resources.

- Cash advances are based on estimations carried out by central

government→ lack of transparency → difficulties in budgetary

execution → inability to implement own fiscal policy

Tax fraud is an additional problem. Mainly carried out by the

Spanish Tax Agency, very poor results (black economy

represents 24% of the whole Spanish economy).

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5. Management power over taxes

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5. Management power over taxes

Evolution of cash advances and annual liquid resources of financing model subject to liquidation

Million €

2007 2008 2009 2010 2011 2012 2013

Total cash advances (1) 13.984 14.846 17.334 15.772 15.407 14.845 14.930

T-2 liquidation 866 1.102 817 - - 917 848

Negative liquidations refund -138 -303 -303

Annual resources received (2) 14.850 15.947 18.151 15.772 15.269 15.458 15.474

Annual financing model liquidation (3) 817 -690 -2.478 917 848

Annual total amount (4)=(1)+(3) 14.801 14.155 14.856 16.689 16.254

% difference (4)/(2) 5,8 -4,7 -14,3 5,8 5,5

Annual variation (M€) -646 701 1.833 -435

Annual variation ( %) -4,4 5,0 12,3 -2,6

2002 financing model 2009 financing model

Final 2008 and 2009 settlements were lower than cash advances

(4,6% and 14,3%).

Final 2010 settlement was 5,8% higher than previous forecast.

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6. Current situation

Central government disloyalty:

Central government modifies legislation impact

on ACs expenditure needs without financial

compensation.

Increases in tax rates (VAT and special taxes) do

not benefit ACs as additional yields remain in the

central administration.

Catalan objectives:

Catalan government aspires to collect and manage

all taxes in order to have the capacity to decide its

own fiscal policy.