Ignacio González, president of the Madrid regional government, said yesterday in elEconomista that Madrid is increasing the number of taxpayers due to problems from other regions. Although he was not more explicit, González was referring to Catalonian companies that are switching their tax domicile to Madrid.
In the wake of efforts to assert its independence from Spain, the Catalonian government has approved higher taxes in the region. As a result, both capital and companies are fleeing. Catalonia's leader Artur Mas did not mention these negative consequences when he preached the benefits of higher taxes and a separation from Spain. Residents of Catalonia know that taxes are 5% lower in Madrid and that even with a million fewer taxpayers it collected 700 million more euros in revenue. González denies that his region's higher tax efficiency results from a better financing situation in Madrid. It is the only region that will see the number of taxpayers drop by 1 million people according to the Ministry of Finance. Further, the system is penalizing regions with a debt ceiling if they do not use the Regional Government Liquidity Fund (Fondo de Liquidez Autonómica or FLA in Spanish) because they have already met their requirements.
A new financing system is necessary. To create it, Spain needs to overhaul its tax collecting system at both the national and regional government levels. Local government reforms will not turn out well if job cuts and adequate financing methods are not executed. A similar situation occurred in 200 when healthcare and education responsibilities were handed down by the national government. 2013 will be another year of spending cuts for the Madrid government, which is using a competitive tax strategy to try and drive economic growth and help it get out of a recession.
