Only three weeks into Spain's EU Council chair, Pedro Sánchez, the country's prime minister, shocked everyone by announcing an immediate election on July 23. These elections might be Spain's final chance to enact pro-growth tax measures at the national level and as the rotating president of the Council, especially before the European Parliament elections, so the stakes are high.
The Impact of the Spanish Elections at the Regional and National Levels
The decision to move forward the national election was made after the left-wing coalition government's parties did poorly in the municipal and regional elections held last month. In most places where they haven't won outright majorities, the opposition People's Party (PP) has amassed enough support to negotiate coalition administrations.
If the PP wins a majority, regional tax policy implemented in previous years is a good indicator of what could occur both at the national and European Union (EU) level following the general elections. The Spanish regions ruled by the center-right party have made progress in the RTCI (Spanish Regional Tax Competitiveness Index) during the past several years thanks to their commitment to pro-growth tax changes.
Regional tax competition has been successful; numerous Spanish areas have imitated the tax changes of Madrid and other top regions. After changing the inheritance tax, Castile and Leon rose seven positions overall in 2022 (from 13th to 6th in the RTCI). The maximum statutory inheritance tax rate was first reduced in Andalusia in 2022 from 81.6 percent to 49.6 percent, which is barely below the top tax rates in Germany and Switzerland of 50 percent.
Instead of focusing their tax policy on establishing an individual income tax system that increases wages, employment, and workers' mobility, regions are considering eliminating or reducing wealth and inheritance taxes that have a detrimental impact on entrepreneurship, saving, and work. As more areas are expected to be controlled by the People's Party or coalition governments they are a part of, this tendency is anticipated to intensify in the upcoming months. During Pedro Sánchez's five years in office, it was this regional tax rivalry that kept Spain from becoming the tax haven of Europe.
In addition, Spain's international tax competitiveness has been severely hurt by national tax policy modifications. The International Tax Competitiveness Index (ITCI) for 2022 ranks 38 nations, and Spain has declined from 26th to 34th place since 2020.
Spain has implemented a financial transactions tax (FTT), a digital services tax (DST), and a specific value-added tax (VAT) on sugary beverages during the past several years. Additionally, new taxes were authorized by the conclusion of 2022. A two-year windfall profit tax on banks and energy firms was implemented by Spain. The laws that were passed, nevertheless, do more than just tax windfall gains; they are not legitimate windfall profit taxes. Following the adoption of the EU-wide windfall tax, the nation's administration committed to conform the two windfall taxes, which had received harsh criticism from the affected industries. However, no adjustments were proposed. Although the EU-wide windfall tax—also known as the "solidarity contribution tax"—is a bad idea, it is less problematic than the present windfall profit taxes.
Spain's international tax competitiveness has been affected by these tax measures and will continue to be harmed. The country's overall ranking in the 2023 ITCI would decline even more if the most recent tax measures, which were implemented between the end of 2022 and the beginning of 2023, are not overturned.
The opposition leader in Spain, Alberto Nez Feijoo, has stated that tax reforms would be implemented in an effort to "attract investment and tell companies that Spain is the best place for them to invest." In addition to reviewing the wealth tax that Sánchez approved last year, he intends to repeal or alter the two windfall taxes. Additionally, he expressed worry over Spain's national debt and expressed a desire to reduce the budget deficit.
According to polls, PP and Vox, the other right-wing party in Spain, have a large enough lead to establish a government. However, difficult discussions between the two parties to create regional administrations may put both parties in danger ahead of the elections on July 23. The much-needed revision of Spain's tax system may result from the change in government from left, supported by the far-left, to center-right. Spain should completely eliminate the FTT, DST, and wealth taxes in addition to the tax measures Feijóo has proposed (a 2008 partial repeal of the wealth tax by José Luis Rodrguez Zapatero was undone three years later). Spain should look at full expensing for capital investments and widen the VAT tax base in order to change the tax mix toward less detrimental consumption taxes in order to boost private investment and quicken economic growth.
Spain should put into effect tax measures that can assist private investment, employment, and the recruitment of highly skilled employees while boosting its domestic and global tax competitiveness.
The Impact of the Spanish General Election at the European Level
The elections in Spain will also have an influence on tax policy throughout the continent, particularly as Spain gears up to assume its sixth rotating EU Council president on July 1. National elections have been held during rotating presidencies before; the most recent instance was France in the first half of 2022.
The Spanish Presidency is anticipated to continue debating the important issues raised by the Swedish Presidency, such as the package titled "VAT in the Digital Age" and the "UNSHELL" proposal to stop the improper use of shell firms for tax reasons. However, the perspective may be different now because Spain announced several of its tax-related goals for the coming months in June, including the consolidation of the "Social Pillar" and the establishment of a uniform minimum level of corporate taxes for all Member States in order to combat giant multinational corporations' tax avoidance. Additionally, it plans to keep updating the fiscal regulations to incorporate the openness and flexibility needed for the green and digital transformations.
On the one hand, if Sánchez is reelected and is successful in forming a government, these goals are probably going to stay the same. Specific suggestions could get greater consideration; for instance, the Commission clearly prioritizes the UNSHELL plan, which has gained widespread interest and will help advance the battle against tax evasion. Commissioner Gentiloni has emphasized the significance of advancing this case repeatedly.
On the other side, a change in power might open up opportunities for wrangling over other issues, including Own Resources. Sánchez has historically preferred "Marshall Plan" public investment initiatives of the European model, but has not placed a high priority on coming up with ways to pay for these programs.
For his part, Feijóo hasn't said much directly on the EU Own Resources either; his rhetoric probably appeals to national rather than European audiences. But his views on budgetary restraint and pro-growth tax changes are likely to be replicated at the European level. If Feijóo is elected, the attention may turn more toward repaying European debt and less toward addressing the files on Own Resources. Feijóo declared that he already has the working group that would assume Spain's duties during its EU Council presidency, but this move is also dependent on the outcome of the elections and potential coalitions.
A national election's significance at the European level shouldn't be overestimated, though. While the Council of the EU's leadership may change, much of the conversations are carried out by Brussels-based civil officials who have been preparing for this time for years. Because of this, the files on hand are likely to stay the same regardless of the political dynamics.
However, national politics may probably interfere with Spain's capacity to concentrate on its EU goals, and as a result of this leadership void, some files may be pushed onto its deck.
In this regard, it is possible that other demands, such as the pressing need to pay down the European debt, will have an impact on the Council's objectives. After Ursula von der Leyen, President of the European Commission, and the College of Commissioners visited Madrid on July 3, this may be verified. This visit was planned ahead of time to avoid the height of the Spanish election campaign, but it may also be an indication that the Commission wants to highlight how crucial it is for the first and second baskets of Own Resources to proceed in the Council. The NextGeneration EU (NGEU), of which Spain was one of the top winners, will be financed by these new Own Resources, which are intended to provide a steady revenue stream.
Given the likelihood of a political void in Spain's top leadership position, the Commission may use the chance to direct the conversations over the Own Resources files. Before the Union enters the European Parliament election frenzy or less cooperative Member States control the presidency, the Council has to bring these items forward quickly.
Considering the necessity of national pro-growth tax changes and the endeavor to advance the Own Resources and UNSHELL files, the Spanish elections may, depending on who the Spanish population votes for, come at the ideal time.
