2024 Spanish Regional Tax Competitiveness Index

Executive Summary

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 enables policymakers, businesses, and taxpayers to measure and evaluate their regions’ tax systems. This Index analyzes how well regions structure their tax systems and serves as a road map for policymakers to reform their tax systems, making 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 across regions.

Main Tax Trends

After the Spanish central government introduced a “solidarity wealth tax” for net assets exceeding €3 million on top of regional wealth taxes, some of the regions that offered 100 percent relief approved a temporary 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 and local taxes paid, mortgage interest, and charitable contributions. for the difference between the regional wealth tax liability and the solidarity wealth tax liability.[1] This would allow Andalusia and Madrid to retain the revenues the central government planned to collect in 2024 while still offering relief to individuals with a net wealth below €3 million. Additionally, three other regions raised the exception threshold to €3 million (Balearic Island and Cantabria) and €3.7 million (Murcia) to equal the tax relief offered by Andalusia, Extremadura, and Madrid.

Following the 2023 RTCI recommendations, Valencia Community, Canary Islands, and La Rioja reformed their inheritance taxes by offering 99 percent tax relief for close heirs. With this addition, there are now 11 regions that offer important tax relief for close heirs. Currently, Spain has the highest inheritance tax rate in the world. For unrelated or distant heirs, the top inheritance tax rate reaches 87.6 percent, transforming the inheritance tax into a confiscatory measure. The relief offered by most of the Spanish regions for close heirs is motivated by the high inheritance tax liabilities that push taxpayers to disclaim inheritances by selling assets. However, like the wealth tax, the central government is looking to introduce a new inheritance tax on top of the current one, to eliminate the deductions for close heirs that most regions currently apply.

The five best regions in this year’s Index:

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

What distinguishes the top five regions from the rest is their high score in each of the five components of the Index.

Madrid

Madrid’s income tax reforms have reinforced its top ranking. Following the 2023 RTCI recommendations, Madrid indexed its 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. 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. . It also raised the basic 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 the child tax credit in addition to increasing the generosity of the personal income tax measures to support large families. Madrid could also cut the tax rate for the first income tax bracket by 0.5 percentage points, to equal the one applied in Extremadura and La Rioja. Madrid could further improve 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.

Basque Country

The differences among the three Basque provinces are driven by the wealth tax component of the Index. On the wealth tax component, Guipuzcoa ranks 16^th, Alava 8^th, and Biscay 7^th. In 2024, Biscay, Alava, and Guipuzcoa indexed their income taxes to inflation and raised the basic tax credit and child tax credit. Although the three Basque provinces still occupy the second, third, and fourth positions, Alava’s temporary tax for low- and medium-income households introduced in 2023 expired in 2024, pushing Alava back to 3^rd place, behind Biscay.

All three Basque provinces could benefit from reforming their inheritance taxes as they are tied for 12^th place on this component of the Index. Additionally, Guipuzcoa could improve by raising the wealth tax threshold to the level applied in Biscay and reducing the tax rate.

Andalusia

Andalusia retained 5^th place in the 2024 Index due to approving a temporary tax deduction for the difference between the regional wealth tax liability and the solidarity wealth tax liability. This allowed Andalusia to keep the 100 percent tax relief for taxpayers with net assets below €3 million. Andalusia could improve its overall position in the Index by reducing the number of other regional taxes and by cutting the top income tax rate.

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

15. Castilla La-Mancha
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.

Catalonia

Despite repealing the wealth tax bracket, introduced in 2023, for net assets exceeding €20 million, Catalonia didn’t improve its score, ranking last in the overall Index. Catalonia has twice as many regional taxes compared to the rest of the Spanish regions and some of the worst-structured individual income, inheritance, and wealth taxes.

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Asturias

Despite increasing the generosity of the personal income tax to support families with children, Asturias dropped from 17^th to 18^th place in the 2024 Index. Asturias would benefit significantly from income and inheritance tax reform. Asturians have by far the highest inheritance tax liability among the regions.

Aragon

Aragon introduced two new regional taxes on wind and solar farms and dropped in the overall Index from 16^th to 17^th place. However, following 2023 RCTI recommendations, Aragon indexed the first two 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. to inflation and raised the wealth tax exception threshold from €400,000 to €700,000. After slightly improving the wealth tax component, Aragon still has several shortcomings regarding other taxes, income, and inheritance tax components.

Valencia Community

Valencia Community reformed wealth and inheritance taxes and improved its overall rank from 18^th to 16^th place. Valencia reformed the inheritance tax by offering 99 percent tax relief for close heirs, reduced the top marginal wealth tax rate, and repealed the tourist tax. Valencia still has some of the most burdensome wealth taxes, 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 (55.4 percent), and Austria (55 percent).

Castilla-La Mancha

Due to the lack of tax reforms and the improvement of Extremadura, Cantabria, and Balearic Islands, Castilla-La Mancha dropped four places in the 2024 Index to 15^th overall.

2024 Regional Tax Competitiveness Index Ranks, Component Tax Ranks and 2023-2024 Changes

Source: 2024 Spanish Regional Tax Competitiveness Index

Notable Ranking Changes in this Year’s Spanish Regional Tax Competitiveness Index

Extremadura

Extremadura reformed the wealth tax by offering 100 tax relief. It also reformed the income tax. On the one hand, it cut the marginal income tax rate for the first two brackets; on the other hand, it increased the 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. for the other three tax brackets. Additionally, it improved the inheritance tax deduction for close heirs and repealed the tax on empty houses. Due to these reforms, Extremadura improved eight places overall, from 15^th to 7^th, in the 2024 Index.

Canary Islands

The Canary Islands reformed the inheritance tax, offering 99 percent tax relief for close heirs, and improved two places in the 2024 Index to 6^th overall. This improvement was in part due to the decline of Murcia Castile and Leon.

La Rioja

La Rioja cut the marginal income tax rate for seven of the eight tax brackets and improved the inheritance tax relief for close heirs. La Rioja improved its overall rank from 10^th to 8^th place.

Balearic Islands

Balearic Island cut the income tax rate for all tax brackets and raised the wealth tax exception threshold from €0.7 million to €3 million.

Murcia and Castile and Leon

The lack of reforms and the improvement of Canarias, Extremadura, and La Rioja, led Murcia, as well as Castile and Leon, to each drop three places to 9^th and 10^th, respectively.

Galicia

Galicia increased the wealth tax marginal rate from 2.5 percent to 3.5 percent and dropped two places in the 2024 Index to 11^th overall.

Navarra

Despite indexing the tax brackets, the basic tax credit, and the child tax credit to inflation, following the 2023 RTCI recommendation, Navarra dropped one place in the 2024 Index to 14^th place.

[1] While Andalusia, Madrid, and Extremadura offer 100 percent relief, Extremadura chose not to implement this deduction, allowing the central government to collect all the revenue, if any, from the residents in Extremadura with a net wealth exceeding €3 million.

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