Regional negotiation, constitutionality and taxation

Francisco Marcos and Albert Sánchez. Observatory on Competition Policy . IE Business School

30 May 2006

Spain’s move to draw up a new financing system for its 17 autonomous regions could be conditioned by a ruling by the Constitutional Court on the right of regional governments to levy special taxes on large commercial centres. A ruling that the current Government seems to be prepared to avoid as part of the negotiation with the regions. The authors argue that these two issues should be dealt with separately.

On 30 December 2005, the regional government of Aragon in northern Spain enacted a law which imposed a new tax on the environmental damage caused by hyper-markets, among other measures. This new levy followed a move by the regions of Catalonia, Asturias and Navarre to introduce a tax on large commercial centres (IGEC) in 2001.

Questions have arisen about the constitutionality of the IGEC, as well as to its adherence to European Community regulations--those regarding freedom of establishment and the ban on public subsidies—and its economic rationale (issues we looked at in Los Impuestos sobre los Grandes Establecimientos Comerciales (IGEC): Un análisis jurídico y económico, Aranzadi, 2005).

At the time, these concerns led the central Government to file claims of unconstitutionality against the IGEC in Catalonia, Asturias and Navarre (all of which are still undecided by Spain’s Constitutional Court). Now recent events suggest that Aragon is poised to fall into a similar legal trap. In fact, the Spanish cabinet expressed its own misgivings about the new law during its weekly meeting on March 24, when it asked the Spanish Prime Minister to file a claim of unconstitutionality against Aragon’s new tax regulations.

To date, the legal procedures aimed at ensuring the constitutionality of Spain’s tax system appear to be working properly, and the Constitutional Court is expected to rule on whether the IGEC violates the Spanish charter. After the lodging of the claims of unconstitutionality by the former Government, the Constitutional Court has exclusive jurisdiction over this tax issue, ,which should under no circumstance be addressed as part of the talks on a new financing system for Spain’s 17 autonomous regions. However, a Constitutional Court ruling on this tax issue could be avoided if the Government decided to withdraw the pending unconstitutionality claims—in a rather broad conception of its discretionary powers in this field--.

Both regional political parties and the congressional economy committee seem to favour the possibility of withdrawing the claims of unconstitutionality against the IGEC once the groundwork for the new regional financing system is laid (see Expansion of 06/04/06). To that end, a certain political consensus is forming around the possibility of correcting the shortcomings of the IGEC through the introduction of new tax legislation for the regions. In our opinion, this measure is ill-conceived and subverts the logic of our legal system.

First of all, the process for determining whether or not the current IGEC are constitutional should establish whether the regions have the power and the justification to tax the hyper-markets for damage caused to the environment or whether the tax has no legal basis and should simply be revoked. In the latter case, it would make little sense to enact new fiscal legislation that draws the limits of a tax already ruled unconstitutional.

Secondly, an explicit ruling by the Constitutional Court will contribute to a clearer interpretation of the fiscal standards and principles enshrined in the Constitution, while establishing the standards to which new regional legislation should adhere, and not the other way around. Consequently, a move to clarify the jurisprudence of the Constitutional Court for interpreting the boundaries of the regional taxation and financing systems will improve the efficiency of both and reduce the number of related lawsuits.

Finally, independently of whether the court ruling declares IGEC constitutional or not, its decision is important because of the economic impact it will have on the undertakings that have been paying the tax in recent years---either because the tax is declared irrevocable or because large sums of money will be returned.

For all these reasons, we believe that the question of our tax system’s constitutionality should not become an instrument of political negotiation. The issues surrounding the current regional tax system (and, in particular, the IGEC) should remain separate from the design of the new financing system for regional governments.

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