Below is an excerpt of the 2023 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 enables policymakers, businesses, and taxpayers to measure and evaluate their regions’ tax systems. This Index has been designed to analyze how well regions structure their tax system and serves as a road map for policymakers to reform their tax systems by 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 with those of other regions.
The five best regions in this year’s Index are:
- Community of Madrid
What distinguishes the top five regions from the rest is their high 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 important income tax reforms that reinforce its top ranking. Following the 2022 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. , child tax credit, and increased the generosity of the personal income tax measures to support large families. 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.
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, Guipzuzcoa ranks 13th, Alava 6th, and Biscay 5th. On the income tax component, Alava ranks 1st while Guipuzcoa and Biscay rank 2nd. In 2023, Biscay, Alava, and Guipuzcoa indexed their income tax 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 introduced a new tax credit of up to €200 for low and medium-income households that moved them ahead of Biscay.
All three Basque provinces could benefit from reforming the inheritance tax as they are tied for ninth place on this component of the Index. Additionally, Guipuzcoa could improve by raising the wealth tax threshold to the level applied in Biscay while reducing the tax rate.
Andalusia improved its score by 0.37 points and moved from 7th to 5th place in the 2023 Index. In 2023, Andalusia indexed the first two income tax brackets to inflation and raised the basic tax credit. Additionally, it approved a 100 percent relief on the wealth tax. Andalusia could improve its overall position in the Index by reducing the number of other regional taxes.
The five 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.
Despite repealing four regional taxes due to the implementation of a federal tax on waste disposal, Catalonia still has twice as many regional taxes compared to the rest of the Spanish regions. Additionally, in 2023, a new wealth 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. for net assets exceeding €20 million was introduced. Catalonia, which has some of the worst-structured individual income, inheritance, and wealth taxes, ranks last in the overall Index.
Valencia Community scores low in all the components of the Index and has some of the most burdensome inheritance, wealth, 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). Furthermore, in 2023, it approved tax reforms that reduced its tax competitiveness. While it initially reduced the minimum income tax rate and indexed the first two income tax brackets to inflation, it later raised the income tax rates for incomes exceeding €52,000. Valencia Community also raised the top marginal wealth tax rate to 3.75 percent, which is not only the highest top wealth tax rate in Spain but also in the world.
Despite increasing the generosity of the personal income tax to support large families, Asturias dropped from 16th to 17th place in the 2023 Index. Asturias would benefit significantly from income and inheritance tax reform. Asturians have by far the highest inheritance tax liability among the regions.
Aragon reformed the income tax and improved its overall rank from 17th to 16th place. On the one hand, it increased the maximum marginal income tax rate by 0.5 points; on the other hand, it cut the minimum tax rate and the number of tax brackets. Aragon has several shortcomings regarding income, inheritance, and wealth tax components.
Extremadura has not undertaken any type of reform this year and remained in 15th place in the 2023 Index. After having reformed the inheritance tax in 2018, Extremadura should examine reforms to the wealth and income taxes; it ranks 19th and 18th, respectively, on these components of the Index.
2023 Regional Tax Competitiveness Index Ranks, Component Tax Ranks and 2022-2023 Changes
|2023 Overall Rank||2023 Overall Score||2022 Overall Rank||Change in Rank from 2022 to 2023||2023 Individual Income Tax Rank||Change in Individual Income Tax Rank from 2022 to 2023||2023 Wealth Tax Rank||Change in Wealth Tax Rank from 2022 to 2023||2023 Inheritance Tax Rank||Change in Inheritance Tax Rank from 2022 to 2023||2023 Transfer Tax and Stamp Duty Rank||Change in Transfer Tax and Stamp Duty Rank from 2022 to 2023||2023 Other Taxes Rank||Change in Other Taxes Rank from 2022 to 2023|
|Castile and Leon||7||6.24||6||-1||6||-1||7||-1||5||-1||15||1||5||1|
Notable Ranking Changes in this Year’s Spanish Regional Tax Competitiveness Index
Eight other regions changed their positions in the Index from the 2022 edition.
In 2023, Murcia completed a scheduled income tax reform introduced in 2019 to cut the rates for all income tax brackets. Additionally, the income tax brackets for low-income households were indexed to inflation. The wealth tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. threshold was raised from €0.7 million to €3.7 million. Because of these reforms, Murcia improved four places overall, from 10th to 6th, in the 2023 Index.
Castilla-La Mancha and Cantabria
Castilla-La Mancha and Cantabria move up one place overall to 11th and 12th in the overall Index due to Navarre’s decline.
Despite indexing the tax brackets to inflation for low-income households, the improvement of Andalusia and Murcia led the Canary Islands to drop three places in the 2023 Index to 8th overall.
Despite raising the income tax threshold, Navarra dropped two places in the 2023 Index to 13th place as this reform is narrower than a similar reform introduced over five years ago in all Spanish regions (except for Navarre and Basque Country’s provinces). Navarre also introduced an additional wealth tax bracket with a 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. of 3.5 percent.
Galicia, La Rioja, and Castille and Leon
In 2023, Galicia indexed the income tax brackets to inflation and cut the wealth tax. Nevertheless, the improvement of Murcia led Galicia to drop one place in the 2023 Index to 9th overall.
The improvement of Murcia and Andalusia also led La Rioja, as well as Castille and Leon, to each drop one place to 7th and 10th place, respectively.
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