Tax autonomy without tax competition ?The case of the Belgian regions

Christian VALENDUCFederal Ministry of Finance - Belgium

Tax autonomy without tax competition ?

The pre-reform situation Current fiscal arrangements The use of tax autonomy by the

Regions since the 2001 reform Why tax autonomy has not resulted in

(harmful) tax competition NB: we just discuss the tax autonomy

of Regions (communities not included)

Tax autonomy without tax competition ?I. The pre-reform situation

Regions may create their own taxes, subject to a “non bis in idem” rule”

Full autonomy on some minor (former federal) taxes

Rate autonomy, including the possibility to put surcharges on the federal PIT or on registration duties

According to HCF (1998), very limited use of tax autonomy by the Regions

Claim for more tax autonomy on the political side, mainly in Flanders

Tax autonomy without tax competition ?II. Current fiscal arrangements (2001 reform)

Regions may create their own taxes, subject to a “non bis in idem” rule

Full autonomy on “Regional taxes” (former federal taxes) Gambling tax, registration duties, inheritance duties, gift tax,

mortgage tax, taxes on vehicles and some other minor taxes Property tax but..

Local surcharges account for 95% of the rate Regions may not change the imputed rent (part of PIT tax base) but

may opt for another tax base Rate autonomy on PIT but

May not reduce the progressivity of PIT (explicit definition) May not result in harmful tax competition (no explicit definition) May not exceed +/- 6,75% of the PIT revenue of the Region Regions may set up their own tax incentives

Tax autonomy without tax competition ?II. Current fiscal arrangements (2001 reform)

Regions may collect themselves “regional” (former federal) taxes

Safeguards provisions Limits on the “rate autonomy for PIT” Definition of residence for inheritance duties Horizontal agreement needed for any

change on the taxation of leased vehicles or for vehicles owned by firms

How large is the tax autonomy of Regions ? Tax autonomy of the Belgian Regions in an

international setting

Tax autonomy without tax competition ?II. Current fiscal arrangements (2001 reform)

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1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

How large is the tax autonomy of the Regions ?

Own taxes Other regional taxes - full aut. Rate autonomy Only surcharges

Tax autonomy without tax competition ?II. Current fiscal arrangements (2001 reform)

Tax autonomy (% total tax revenue): international comparison

B D Ö CH Sp

Full autonomy 45 0 3 73 12

Rate autonomy only 55 0 0 27 88

No tax autonomy 0 100 97 0 0

What about the decentralisation of…

Redistribution ? + 0 0 ++ ++

Incentives ? ++ 0 0 ++ +

Tax collection ? + +++ +++ +++ ++

Tax autonomy without tax competition ?III. Has the extended room been used ?

More widely used than prior to the 2001 reform

But Regions did not ask for collecting themselves regional taxes Accountability issue

Leading role of Flanders In some cases, tax changes supporting

broader policy initiatives Tax incentives (PIT) for investment in venture

capital (Flanders) Tax credit for private loans to SME’s (Flanders) Abolition of property tax on fixes assets held by

entreprises (Wall)

Tax autonomy without tax competition ?III. Has the extended room been used ?

Registration duties Highest rate in Europe (12,5%) No consensus for changes during the

nineties Reduced rates or tax rebates in Flanders

and Brussels, aiming at improving mobility (Flanders, portability of registration fees) or home ownership (Flanders)

Tax autonomy without tax competition ? III. Has the extended room been used ?

Inheritance duties and gift tax Rules were “out of date” when the tax

competences were devoluted No link with competences in the spending side Tax autonomy extensively used (31 changes

since 2002) Tax mimicking Changes of tax rules in support of

Economic policy (Zero tax rate for entreprises) Housing policy (Support for home ownership in Brussels) Fight against tax evasion (reduced rate for financial

assets and for gifts)

Tax autonomy without tax competition ? III. Has the extended room been used ?

PIT: only Flanders Tax credits introduced

Targeted on low wages Extended to any earned income in 2009

(Regional elections…) Back to targeting in 2010

Tax autonomy without tax competition ? IV. Why…? Tentative explanations

No competition for tax bases, but some tax mimicking

Safeguards have played their role PIT and progressivity Definition of residence for inheritance duties Requirements for cooperation agreement for

vehicle taxes Changes focus on immobile tax bases (or to

tax bases of which the mobility was reduced by the safeguard provisions)

Limited room for tax cuts, apart for Flanders