Tax autonomy without tax competition ? The case of the Belgian regions Christian VALENDUC Federal 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)

Tax autonomy (% total tax revenue): international comparison BDÖCHSp Full autonomy Rate autonomy only No tax autonomy What about the decentralisation of… Redistribution ?+00++ Incentives ? 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