Note: Below is an excerpt of the 2022 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 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 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 five best regions in this year’s Index are:
- Community of Madrid
- Canary Islands
What distinguishes the top five regions from the rest is their good score in each of the five components of the Index. None of the top five regions are among the five lowest-ranked regions in any of the five separate components of the Index.
Madrid has undertaken two important tax reforms and improved its score by 0.73 points in the overall Index, reinforcing its first place. Madrid cut income tax rates by 0.5 percentage points for each 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. and abolished all regional taxes, except for stamp duty, transfer, income, wealth, and inheritance taxes. Madrid could improve more by cutting the top inheritance tax rate from 34 percent to 25 percent and abolishing the factor that depends on the level of pre-inheritance wealth and familial closeness to the inheritor. It could also index the tax code (especially the income tax) 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. on a yearly base to avoid bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. .
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 4th, and Biscay 3rd. On the income tax component, Alava ranks 1st while Guipuzcoa and Biscay rank 2nd. In 2022, Biscay, Alava, and Guipuzcoa indexed their income tax inflation and remain in second, third, and fourth in the overall Index.
All three Basque provinces could benefit from reforming the inheritance tax as they are tied for eighth 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 have not carried out any tax reforms in the last year and remain in fifth place in the overall Index. They could improve by revoking 2020’s income and inheritance tax reforms and by cutting wealth tax bracket rates by up to 2.5 percentage points.
The five lowest-ranked regions in this year’s Index are:
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 2022, none of the five regions at the bottom of the ranking adopted tax reforms that would improve their score. Catalonia cut the income tax rate for low-income households but at the same time a regional deduction was declared unconstitutional, worsening Catalonia’s overall score on the 2022 Index. The bottom five regions in 2022 are the same as in 2021. However, over the past five years, Andalusia worked its way up and out of the bottom five regions through tax reforms while Asturias joined the bottom five due to its lack of reforms.
Catalonia, which has three times as many regional taxes compared to the rest of the Spanish regions, ranks last in the overall Index. Catalonia has some of the worst-structured individual income, inheritance, and wealth taxes.
Valencia Community scores low in all the components of the Index and has some of the most burdensome inheritance, transfer taxes, and stamp duties in Spain. Additionally, Valencia’s overall (central and regional) top marginal income tax rate stands at 54 percent, the fourth highest in Europe after Denmark (55.9 percent), France (55.2 percent) and Austria (55 percent).
Aragon, at 17th, has several shortcomings regarding income, inheritance, and wealth tax components of the Index.
Asturias has not undertaken any type of reforms this year and remained in 16th place in the 2022 Index. Asturias would benefit significantly from income and inheritance tax reform. 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 2022 Index. After having reformed the inheritance tax in 2018, Extremadura should examine reforms to the wealth and income taxes; it ranks 19th on these components of the Index.
|2022 Overall Rank||2022 Overall Score||2021 Overall Rank||Change in Rank from 2021 to 2022||2022 Individual Income Tax Rank||Change in Individual Income Tax Rank from 2021 to 2022||2022 Wealth Tax Rank||Change in Wealth Tax Rank from 2021 to 2022||2022 Inheritance Tax Rank||Change in Inheritance Tax Rank from 2021 to 2022||Transfer Tax and Stamp Duty Rank 2022||Change in Transfer Tax and Stamp Duty Rank from 2021 to 2022||2022 Other Taxes Rank||Change in Other Taxes Rank from 2021 to 2022|
|Castile and Leon||6||6.24||6||0||5||0||6||-1||4||0||16||-1||6||-1|
|2022 Spanish Regional Tax Competitiveness Index|
Notable Ranking Changes in this Year’s Spanish Regional Tax Competitiveness Index
Seven regions changed their positions in the Index during the past year.
Galicia reformed transfer and income taxes. Additionally, a 25 percent wealth tax to 2nd place on the wealth tax component. Because of these reforms, Galicia improved four places overall, from 12th to 8th in the 2022 Index.
Navarre indexed income tax to inflation and raised child tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. s for the first time since the 2016 income tax reform. This improved the region’s overall rank from 14th to 11th place.
Castilla-La Mancha and Cantabria
Castilla-La Mancha and Cantabria dropped two places overall to 12th and 13th in the overall Index due to the improvement of Navarre and Galicia.
La Rioja and Murcia
Murcia is in the process of lowering its income tax rate. The scheduled annual rate reductions began in 2019 and will continue through 2023. However, this reduction was not enough for Murcia to maintain its position. Both Murcia and La Rioja dropped one place to 9th and 10th in the overall Index due to the improvement of Galicia.
In 2022, the Balearic Islands increased the transaction tax. This, and the improvement of Navarre, led the Balearic Islands to drop one place in the 2022 Index, to 14th overall.
In 2022, Andalusia reformed income taxes and made permanent the 2021 reduction of stamp duty and transfer taxes. Additionally, the reform of the inheritance tax led Andalusia to have the third lowest top inheritance tax rate in Spain after Navarre and Basque Country. However, these tax reforms were not enough for Andalusia to improve its overall position in the Index. In order to do so, a reduction in the number of other regional taxes is necessary.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe