A selected issues paper published by the IMF on 14 August 2015 covers among other matters the challenge of coordination between national and regional levels of government in relation to fiscal consolidation. As significant taxing powers have been devolved to the regions this also touches on tax policy.

In a decentralized economy such as Spain where the regions have extensive legislative powers the coordination of the different levels of government is important for successful fiscal consolidation. Fiscal reforms that can help the regional governments to participate fully in the effort for fiscal consolidation are therefore necessary. The IMF considers that fiscal policy has become better aligned across the levels of government since the financial crisis.

The subnational governments have used their enhanced tax and spending powers during the crisis period to support the fiscal consolidation effort. From 2010 the subnational governments contributed to the consolidation effort by increasing regional taxes and fees, in particular with new environmental taxes and increases in the rates of tax applied to property transactions, some excises and individual income tax. Regional governments have increased their information sharing, however there is a need to review the current institutional arrangements to improve fiscal coordination.

The IMF has looked at the design and implementation challenges facing Spain in this area and the possibility of improving the situation further. The IMF notes that fiscal non-compliance remained weak in the regions and a number of the regions could not meet their targets for most years between 2010 and 2014. Recent fiscal governance reforms should be examined to assess how well they have been implemented and to identify any gaps in design and implementation.

Taxing powers in the regions

Under covenants concluded in 1978 the Basque country and Navarra are responsible for the administration and collection of all taxes accrued in their territory apart from customs duty. They do not share revenues with other regions but transfer back to central government the share of the central government budget that relates to the non-devolved spending responsibilities.

Other regions finance their spending through a combination of their own revenue, shared revenue and government transfers. They do not have full regulatory powers over all taxes in their territory. Over past decades the taxing powers of the regions have increased, permitting them to set tax rates and put in place tax credits and allowances. Revenue sharing has increased to include a proportion of personal income tax and value added tax, the share of the regions in these taxes increasing to 50% in 2009. Also 58% of revenues from excise duties and other special taxes on alcohol, tobacco and hydrocarbons is devolved to the regions where they were collected.

Tax policy

Among the design and implementation gaps in the regional fiscal framework identified by the IMF is the limited regulatory power of the regions over their own taxes. Although the regions collect around one third of the tax revenues and social security contributions their regulatory power only extends to around half that amount.

The regions have the power to set their own taxes, fees and charges provided that these are not levied by the central government; are not levied outside their territory and do not hinder the free movement of goods and services. However they often do not have full legal control over the tax base or rate structure and also have only limited regulatory power over fees, charges and payments for public services.  Their regulatory power over VAT, excise duty and other indirect taxes is limited by EU regulations.

Among the suggestions made by the IMF in the selected issues paper is that reforms could be made to increase the regulatory power of the regions over devolved tax bases as well as measures to address gaps in the regional financing system. The Fiscal and Financial Policy Council (CPFF) could ensure that there is more coordination of the devolved taxes. Additional regulatory power could be given to the regions in relation to indirect taxes including excise duties and to avoid distortions these changes could be implemented uniformly across the regions.