2020 Spanish Regional Tax Competitiveness Index

Executive Summary

The Regional Tax Competitiveness Index (RTCI) for Spain allows policymakers, businesses, and taxpayers to evaluate and measure how their regions’ tax systems compare. This Index has been designed to analyze how well regions structure their tax system. Additionally, it serves as a road map for policymakers to reform their tax systems and make their regions more competitive and attractive for entrepreneurs and residents.

The Index compares 19 Spanish regions on more than 60 variables in five major areas of taxation: individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , wealth tax, inheritance tax, transfer taxes and stamp duties, and other regional taxes, combining the results to generate a final ranking. The Index provides a simple metric to assess the whole tax system and identify strengths and weaknesses. The result is a score that can be compared with those of other regions.

The 5 best regions in this year’s Index are:

1. Community of Madrid
2. Biscay
3. Alava
4. Guipuzcoa
5. Canary Islands

What distinguishes the top 5 regions from the rest is their good score in each of the five components of the Index. None of the top 5 regions will be among the 5 lowest-ranked regions in any of the five components of the Index.

Madrid

Madrid has not carried out any tax reforms in the last year, but it has improved on the income tax component vis-à-vis Biscay, raising its overall rank from 2nd to 1st. Madrid could improve more by reforming the inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. and keep pace with Cantabria, Galicia, and Andalucía. It could also cut income tax rates for certain tax brackets, as it lags behind the Basque Country’s provinces on some brackets.

Basque Country

The differences among the three Basque Provinces are driven by the income component and the wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. component of the Index. On the wealth tax component, Guipzucoa ranks 13^th, Alava 3^rd, and Biscay 2^nd. On the income tax component, Alava has moved ahead to 1^st because income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. were adjusted to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. at the end of 2019 and the personal and family provisions were increased to the level of Guipuzcoa and Biscay.

Biscay

Biscay has fallen to 2^nd by not undertaking any important tax reforms and by losing 0.12 points on the income tax component due to the income tax reforms carried out by Alava.

Alava

Alava maintains 3^rd place due to the income tax reforms undertaken by the end of 2019.

Guipuzcoa

Guipuzcoa also maintains at 4^th place. However, it could improve by raising the wealth tax threshold and tax shield to the level applied in Biscay, while reducing the tax rate.

Additionally, all three Basque Provinces could benefit from reforming the inheritance tax as they are tied for 7^th place on this component of the Index.

Canary Islands

The Canary Islands’ overall rank improved from 6^th to 5^th due to the decline of La Rioja in the overall Index. Nevertheless the overall score of the Islands dropped in 2020, due to the increase in the income tax rate by up to 2 percentage points and the reduction of the inheritance tax credit.

The 5 lowest-ranked regions in this year’s Index are:

15. Extremadura
16. Valencia Community
17. Aragon
18. Asturias
19. Catalonia

The regions with the worst overall scores obtain low scores in almost all the components of the Index and especially in the three most important ones: income tax, wealth tax, and inheritance tax. In 2020, none of the five regions at the bottom of the ranking have adopted tax reforms that would improve their score. Catalonia reduced the inheritance tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. and increased the marginal income tax rate by up to 2 percentage points. These reforms reduced Catalonia’s overall score on the 2020 Index. The bottom 5 regions in 2020 are the same as in 2019.

Catalonia

Catalonia, which has twice as many regional taxes when compared to the rest of the Spanish regions, ranks last in the overall Index in 19^th place. In 2020, a new tax on amenities with an environmental impact was ratified after the tax on the environmental hazard of radio-toxic elements was declared unconstitutional. Catalonia also reduced the inheritance tax credit and raised the marginal income tax rate by up to two points. Additionally, it has one of the worst-structured individual income and wealth taxes.

Asturias

Asturias, 18^th, would benefit significantly from income tax reform and, especially, of the inheritance tax. Asturians have by far the highest inheritance tax liability among the regions.

Aragon

Aragon, 17^th, has several shortcomings regarding income, inheritance, and wealth tax components of the Index.

Valencia Community

Valencia Community, 16^th, scores low in all the components of the Index and has some of the most burdensome inheritance, transfer taxes, and stamp duties in Spain.

Extremadura

Extremadura has not undertaken any type of reform this year and maintained 15^th place in the 2020 Index. After having reformed the inheritance tax in 2018, Extremadura should examine reforms to the wealth and income taxes; it ranks 19^th and 18^th on these components of the Index (respectively).

Notable Ranking Changes in this Year’s Index

Apart from the changes that occurred in the 5 best and 5 lowest-ranked regions, there are four other regions whose overall position in the Index changed during the past year.

La Rioja

Despite La Rioja having reformed income, wealth, and inheritance taxes, it declined in the corresponding components of the Index as well as dropped from 5^th to 6^th in the overall Index.

Balearic Islands

Balearic Islands raised the general tax rate for stamp duty, causing the region’s rank to drop to 12^th in the corresponding tax component. This, and the improvement of Murcia and Galicia, led the Balearic Islands to drop four places in the 2020 Index, to 12^th overall.

Galicia

The inheritance tax reform raised Galicia to 1^st place on the inheritance tax component. Because of that reform (and in spite of having introduced a new regional tax) Galicia improved two places overall, from 12^th to 10^th in the 2020 Index.

Murcia

Murcia is in the process of lowering its income tax rate. Scheduled annual rate reductions began in 2019 and will continue through 2023. The reduction helped the region improve three places on the income tax component, with the region’s overall rank improving from 10^th to 8^th.

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