Madrid loses three times the average income of communities due to its tax cuts

Madrid is the community that squeezes its tax competition the most at the bottom. This low tax policy has become a hallmark of the Madrid government led by the PP for 30 years. In 2021, all tax measures to reduce taxes represented a reduction in regional income of 1.9% of their GDP, a percentage that nearly tripled the regional average (0.65%). That is, Madrid stopped collecting more than 4,000 million due to accumulated tax deductions. The community, headed by the popular Isabel Díaz Ayuso, also stands for another brand. It is the one that spent the least last year on fundamental public services – health, education and social services: 2,920 euros per adjusted resident, compared to 3,197 for the regional average.

These numbers can be extrapolated from the new version of Interactive Observatory of Autonomous Communities Presented this Monday by the Independent Authority for Fiscal Responsibility (Airef), a tool that drinks from public data and where you can consult and compare a tidal wave of regional economic information. Its update comes at a time of stress due to regional taxes and a reform of the regional financing system pending since 2014, which is one step away from being in the air again during this legislature.

Like Madrid, tax cuts in Cantabria, the Canary Islands, Andalusia, La Rioja and Castilla y León have also caused regional incomes to decline above average. At the opposite end are the Balearic Islands, Extremadura and Asturias. The data used by Arief to arrive at these comparisons are derived from the annual budgets of each community’s financial benefits, and refer to dedicated taxes such as property tax, inheritance and donations or patrilineal transfers (ITP and AJD); In case of autonomous segment of personal income tax, if the difference between the increase and decrease in this tax figure is negative, then its amount is also included as tax benefit.

The Balearic Islands are also the community that saw the largest increase in their incomes due to tax increases—in this case, both self and referrals. The impact of all its tax increases represents 1.4% of its GDP in 2021, compared to the regional average of 0.63%. Above this average are Extremadura, Catalonia, the Valencian Community, Cantabria and, albeit slightly, also Andalusia and Aragón.

On the expenditure side, measured in adjusted terms – which takes into account not only population volume but also demographic characteristics such as age and regional characteristics such as surface area or sprawl – in this comparison too, Madrid ranks last. comes to the spot. list : it is the one that spends the least on basic public services, with less amount than health (1,640 euros compared to 1,728), education (938 euros compared to 1,055) and social services (336 euros compared to 370) with. and that, being a smaller community and having a higher population density, it is more economical to provide services.

If primary expenditure is considered, that is, total disbursements without taking interest into account, Madrid also comes out as the community with the lowest disbursements: 3,574 euros per inhabitant. The autonomous provinces with the highest per capita expenditure are the Basque Country and Navarra, which, however, have a different financing system, providing them with more resources. If only the general governance autonomies are included in the comparison, it is La Rioja, Extremadura, Catalonia and Cantabria that recorded the highest current expenditure per inhabitant in 2021.

capital effect

The debate on whether or not Madrid takes advantage of capital effect to reduce taxes is always open and provokes public discourse from time to time. The area is the seat of government, ministries, largest companies and public institutions, and therefore has the best-paid professionals and the largest wealth. In other words: by housing the nation’s capital, it attracts people who have more wealth and income and larger companies, so it ends up collecting more. Furthermore, higher incomes tend to use public systems less than the rest.

For this reason, the financing system statistics do not show this disparity because they do not take into account the spending policies of the regions. Under this plan, all communities must contribute 75% of their regulatory collections to a common bag (which they would have if they did not enact tax increases or cuts), which the state then distributed so that there was no large difference between regions. There should be no difference. However, various funds intervene later to adjust the distribution, the operation of which is complex and not always transparent. Cantabria and La Rioja are the regions with the highest per capita wealth in the system. And although Madrid is somewhat below, it has more of its own resources than other autonomies and a dynamic spending, according to geography, demographics and income, which allows it to lead the tax competition to the bottom.