Fiscal Federalism and Political Decentralization

Fiscal Federalism and Political Decentralization

Lessons from Spain, Germany and Canada

Studies in Fiscal Federalism and State–local Finance series

Edited by Núria Bosch and José M. Durán

This book analyzes political decentralization and fiscal federalism in Canada and Germany, both traditional federal countries, and in Spain, a unitarian country engaged in the last two decades in a process of decentralization. Three key issues required for a well designed financing system are analyzed in depth, namely: tax assignment, equalization grants – i.e. redistribution of money from the wealthy regions or the national government to poorer regions, and the role of local governments in the administration of taxes.

Chapter 7: Fiscal Equalization in Spain

Jesús Ruiz-Huerta Carbonell and Ana Herrero Alcalde

Subjects: economics and finance, political economy, public finance, politics and public policy, political economy, public policy

Extract

Jesús Ruiz-Huerta Carbonell and Ana Herrero Alcalde 1 INTRODUCTION Spain has undergone an intense devolution process during the last three decades. A new level of government – regional government, namely the Autonomous Community (AC) – was created after the 1978 Constitution was passed, and although the constitutional structure of the country is not a federal one, the current degree of decentralization in both taxes and public expenditure is similar to that existing in most federations. As a consequence, the main problems that had to be resolved during that devolution process are very similar to the ones existing in federal countries.1 The financing system of the ACs has gone through a deep process of change since its first implementation in the early 1980s, with a progressive enlargement of regional tax resources and a proportional reduction of central government transfers.2 However, there still is an important level of dependence on those transfers, basically on the Sufficiency Fund (Fondo de Suficiencia), which represents around one-third of ACs’ total resources – approximately 24 000 million euros in 2004. This fund, which is aimed at resolving both vertical and horizontal imbalances, is the main equalization instrument of the Spanish regional financing system. Both the regional tax resources and central government transfers were subject to a strong revision in 2001, which was accepted by all its participants. The main characteristics of that reform were the increase of regional shares in personal income tax (PIT) (33 percent); the implementation of a tax-sharing system in consumption taxes (35...

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