Note: Below is an excerpt of the 2021 Spanish Regional Tax Competitiveness Index (RTCI), a recent report published in collaboration with Fundación para el Avance de la Libertad. Click the link above to download the full report in Spanish.
The Regional 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. 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 systems. 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 the 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
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 are among the 5 lowest-ranked regions in any of the five separate components of the Index.
Madrid has not carried out any tax reforms in the last year and remains in first place. Madrid could improve more by reforming the inheritance tax and keeping pace with Cantabria, Galicia, and Andalusia. 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 ranks 1st while Guipuzcoa and Biscay rank 2nd.
Biscay, Alava, and Guipuzcoa remain in second, third, and fourth place respectively due to a small income tax adjustment the three approved for the 2021 fiscal year. Under the new regulation, annual income under EUR 14,000 is income tax-exempt in all three regions of the Basque Country.
All three Basque Provinces could benefit from reforming the inheritance tax as they are tied for seventh place on this component of the Index. Additionally, Guipuzcoa could improve by raising the wealth tax threshold and tax shield to the level applied in Biscay, while reducing the tax rate.
The Canary Islands remain in fifth place in the overall Index, but the overall score of the Islands dropped in 2021 due to a wealth tax reform implemented by the central government. In 2021, the central government increased the wealth tax’s top bracket rate from 2.5 percent to 3.5 percent. However, since 2001, each region in Spain has been able to amend the general framework of the wealth tax and establish different tax rates and deductions. The Canary Islands is one of the six regions in Spain that has not established specific tax rates for their regional wealth tax. Therefore, the tax increase by the central government was automatically transferred at the regional level, causing the Canary Islands to drop one place on the corresponding component of the Index.
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 2021, none of the five regions at the bottom of the ranking have adopted tax reforms that would improve their score. Valencia Community changed the wealth and income tax and introduced a new regional tax, dropping Valencia’s overall score on the 2021 Index. The bottom 5 regions in 2021 are the same as in 2020. However, over the past five years, Andalusia worked its way up and out of the bottom 5 regions through tax reforms while Asturias joined the bottom 5 due to its lack of reforms.
Catalonia, which has twice as many regional taxes when compared to the rest of the Spanish regions, ranks last in the overall Index. Catalonia has one of the worst-structured individual income, inheritance, and wealth taxes.
Valencia Community has undertaken several tax reforms and dropped from 16th to 18th in the overall Index. In 2021, Valencia Community reduced the wealth tax threshold and increased the top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. from 3.12 percent to 3.5 percent. Additionally, it introduced a new tax on vacant properties and increased the top marginal income tax rate by 4 percentage points. Valencia’s overall (central and regional) top marginal income tax rate stands at 54 percent, fourth highest in Europe after Denmark (55.9 percent), France (55.2 percent), and Austria (55 percent). Valencia scores low in all the components of the Index and has some of the most burdensome inheritance, transfer taxes, and stamp duties in Spain.
Aragon, at 17th, has several shortcomings regarding income, inheritance, and wealth tax components of the Index. Aragon is one of the regions that didn’t establish specific tax rates for the regional wealth tax and therefore the central wealth tax increase was automatically transferred at the regional level, worsening Aragon’s overall score in 2021.
Asturias’s overall rank improved from 18th to 16th due to the decline of Valencia Community in the 2021 Index and the worsening of Aragon’s score. Asturias 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.
Extremadura has not undertaken any type of reform this year and remained in 15th place in the 2021 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.
|2021 Overall Rank||2021 Overall Score||2020 Overall Rank||Change in Rank from 2020 to 2021||2021 Individual Income Tax Rank||Change in Individual Income Tax Rank from 2020 to 2021||2021 Wealth Tax Rank||Change in Wealth Tax Rank from 2020 to 2021||2021 Inheritance Tax Rank||Change in Inheritance Tax Rank from 2020 to 2021||Transfer Tax and Stamp Duty Rank 2021||Change in Transfer Tax and Stamp Duty Rank from 2020 to 2021||2021 Other Taxes Rank||Change in Other Taxes Rank from 2020 to 2021|
|Castile and Leon||6||6.33||13||7||5||0||5||-1||4||14||15||0||5||0|
2021 Spanish Regional Tax Competitiveness Index
Notable Ranking Changes in this Year’s Spanish Regional Tax Competitiveness Index
Apart from the changes that occurred in the 5 best and 5 lowest-ranked regions, the other nine regions also changed their positions in the Index somewhat during the past year.
Castile and Leon
The inheritance tax reform raised Castile and Leon to 4th place on the inheritance tax component. Because of that reform, Castile and Leon improved seven places overall, from 13th to 6th in the 2021 Index.
Andalusia reformed income and wealth taxes while temporarily reducing stamp duty and transfer taxes for 2021. This improved the region’s overall rank from 11th to 7th place.
Castilla-La Mancha is one of the regions where the central wealth tax increase was automatically transferred at the regional level, worsening its overall score in 2021. This, and the improvement of Andalusia, Castile and Leon, and Murcia’s overall score, led Castilla-La Mancha to drop three places in the 2021 Index, to 10th overall.
La Rioja, Cantabria, and Galicia
La Rioja, Cantabria, and Galicia dropped two places overall to 8th, 11th, and 12th in the overall Index due to the improvement of Castile and Leon and Andalusia.
Murcia is in the process of lowering its income tax rate. The scheduled annual rate reductions began in 2019 and will continue through 2023. The reduction helped the region improve on the income tax component, but the region’s overall rank dropped from 8th to 9th due to the improvement of Castile and Leon and Andalusia.
In 2021 the Balearic Islands introduced a new waste incineration tax. This, and the improvement of Castile and Leon, led the Balearic Islands to drop one place in the 2021 Index, to 13th overall.
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