Note: Below is an excerpt of the 2020 Spanish Regional Tax Competitiveness Index (RTCI), a recent report published in collaboration with Fundación para el Avance de la Libertad. The RTCI for Spain is designed to analyze how well regions structure their taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. systems, allows policymakers, businesses, and taxpayers to evaluate and measure how their regions’ tax systems compare, and serves as a road map for policymakers to reform their tax systems and make their regions more competitive and attractive for entrepreneurs and residents. Click the link above to download the full report in Spanish.
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 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. , 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. , 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:
- Community of Madrid
- 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 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 tax and keep pace with Cantabria, Galicia, and Andalucía. It could also cut income tax rates for certain tax bracketA 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. s, as it lags behind the Basque Country’s provinces on some brackets.
The differences among the three Basque Provinces are driven by the income component and the wealth tax component of the Index. On the wealth tax component, Guipzucoa ranks 13th, Alava 3rd, and Biscay 2nd. On the income tax component, Alava has moved ahead to 1st because income tax brackets 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 has fallen to 2nd 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 maintains 3rd place due to the income tax reforms undertaken by the end of 2019.
Guipuzcoa also maintains at 4th 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 7th place on this component of the Index.
The Canary Islands’ overall rank improved from 6th to 5th 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 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. .
The 5 lowest-ranked regions in this year’s Index are:
- Valencia Community
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 credit 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, which has twice as many regional taxes when compared to the rest of the Spanish regions, ranks last in the overall Index in 19th 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, 18th, 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, 17th, has several shortcomings regarding income, inheritance, and wealth tax components of the Index.
Valencia Community, 16th, 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 has not undertaken any type of reform this year and maintained 15th 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 19th and 18th on these components of the Index (respectively).
|2020 Overall Rank||2020 Overall Score||2019 Overall Rank||Change in Rank from 2019 to 2020||2020 Individual Income Tax Rank||Change in Individual Income Tax Rank from 2019 to 2020||2020 Wealth Tax Rank||Change in Wealth Tax Rank from 2019 to 2020||2020 Inheritance Tax Rank||Change in Inheritance Tax Rank from 2019 to 2020||Transfer Tax and Stamp Duty Rank 2020||Change in Transfer Tax and Stamp Duty Rank from 2019 to 2020||2020 Other Taxes Rank||Change in Other Taxes Rank from 2019 to 2020|
|Castile and Leon||13||5.84||13||0||5||0||4||1||18||0||15||0||5||0|
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.
Despite La Rioja having reformed income, wealth, and inheritance taxes, it declined in the corresponding components of the Index as well as dropped from 5th to 6th in the overall Index.
Balearic Islands raised the general tax rate for stamp duty, causing the region’s rank to drop to 12th 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 12th overall.
The inheritance tax reform raised Galicia to 1st 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 12th to 10th in the 2020 Index.
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 10th to 8th.
Note: Above is an excerpt of the 2020 Spanish Regional Tax Competitiveness Index (RTCI), a recent report published in collaboration with Fundación para el Avance de la Libertad. The RTCI for Spain is designed to analyze how well regions structure their tax systems, allows policymakers, businesses, and taxpayers to evaluate and measure how their regions’ tax systems compare, and serves as a road map for policymakers to reform their tax systems and make their regions more competitive and attractive for entrepreneurs and residents. Click the link at the top of the page to download the full report in Spanish.
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