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TAXES

Where your taxes go: how local government spends your money in Spain

Have you wondered how your local town hall raises funds and what your money is being spent on or how it's divided? Here's what you need to know.

Published: 25 May 2023 17:15 CEST
Where your taxes go: how local government spends your money in Spain
Photo: Dimitry/Pixabay.

Politics in Spain is incredibly regional and localised, with governments at the regional (known as autonomous community) and local level (municipality) wielding significant amounts of power over how things are done.

Local governments also have a significant amount of power over how and where your money is spent and on what. If you’ve ever wondered where it all goes to, then read on. 

Where the money comes from?

Municipalities in Spain generally receive money in three ways: from the government, from the regional government, and, of course, from its residents: that is, the local taxes they levy and the fees they charge for providing public services such as rubbish collection.

According to RTVE, money from the national and regional governments combined makes up around a third of municipal income (35 percent) on average across the country. But it’s municipal taxes that generate the most money for town halls, often 50 or 60 percent of the total income they receive.

Municipalities charge their citizens three taxes: a property tax, known as IBI; a road tax, known as VTM; and the Economic Activities Tax, called the IAE.

There are also two optional taxes that can be levied at a local level: the IIVTNU, which taxes the surplus value of a property when it is sold, and a tax on construction and buildings works that effectively functions as a licence to be able to build in the municipality.

READ ALSO: Ten acronyms you need to know to buy a property in Spain

Generally speaking, the tax that costs inhabitants the most (and brings in the most for town halls) is the Impuesto sobre bienes inmuebles or IBI, wich is the property tax. According to statistics from the Spanish treasury, on average it contributes over a quarter (27.5 percent) of the non-financial income to municipal governments and councils.

READ ALSO: What is Spain’s IBI tax and how do I pay it?

In fact, in Spain, there are fifty municipalities that collect more than €2,000 per inhabitant solely on IBI alone.

But that’s not the norm. The average collection in Spain is €365 per inhabitant, though more than 4,000 municipalities collect less than €300 per inhabitant.

Among the most popular places for foreigners to live in Spain, the average IBI revenues per inhabitant (per year) between 2019 and 2021 were:

  • Alicante – €275.54
  • Málaga – €241.76
  • Madrid – €459.38
  • Palma de Mallorca – €275.71
  • Valencia – €299.99
  • Barcelona – €421.83

How do they spend the money?

So, what do the local governments and town halls do with all the tax money they’ve gathered from various places and how do they spend it?

Municipalities spend their tax revenue on providing public services, which can be maintaining public parks, sweeping the streets, repairing lampposts and removing graffiti.

These basic services take around up an average of 40 percent of a town hall’s total expenses, double the 20 percent they allocate to general expenses such as running and paying the staff on the city council itself.

Another 15 percent is spent on public services such as schools, libraries and sports facilities, and 12 percent goes to social services such as care and employment services. Another seven percent goes on local infrastructure such as local transport networks.

READ ALSO – EXPLAINED: How to pay less Spanish IBI property tax

The amount local governments spend, however, can vary wildly, and depend on the size, location and needs of each municipality.

Towns with less than 5,000 inhabitants allocate twice as much per inhabitant to general expenses, while bigger cities spend more on basic services, as they need to devote more resources to a much larger number of people. Often, this is reflected in the tax burden.

From 2019 to 2021, the average expenditure of the 7,751 municipalities across the country was €1,557 per inhabitant per year. Most municipalities spent between €1,000 and €2,000 per person in that time, although there were 2,200 localities below that threshold.

In municipalities of interest to foreigners, the average spend per inhabitant between 2019-2021 was:

  • Alicante – €728.86
  • Málaga – €1041.93
  • Valencia – €1069.65
  • Barcelona – €1680.50
  • Palma – €959.78
  • Madrid – €1419.59

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For members

TAXES

Could inheritance tax soon be scrapped in Spain?

Spain's centre-right Popular Party is hoping to use its absolute majority in the Senate to eliminate inheritance tax at the national level, following the example of several regional governments across the country.

Published: 2 October 2023 11:55 CEST
Could inheritance tax soon be scrapped in Spain?

Spain’s centre-right party the Partido Popular is hoping to take advantage of its absolute majority in the Spanish Senate to pass a bill that would scrap Inheritance Tax (el impuesto de sucesiones) at the national level.

This comes following several regional governments across Spain that have already scrapped the tax. More than half Spain’s 17 regions have in effect eliminated inheritance tax so far.

READ ALSO: EXPLAINED: How choosing the right region in Spain can save you thousands in inheritance tax

Most have done this by subsidising the tax at 99 percent, thus reducing it to 1 percent for inheritance between family members, or by cutting rates, as in Aragón’s and Cantabria’s case.

The regions to cut inheritance tax include Andalusia, the Balearic Islands, the Canary Islands, Castilla y León, Extremadura, Madrid, Murcia, La Rioja and Valencia. Many of these regions are ruled by right-wing PP or PP-Vox coalition governments.

Now the national party intends to make use of its absolute majority in the Senate to push through a bill that proposes the same tax cut at the national level. The plans, which Europa Press has seen and reported on, suggest that inheritance tax “does not make up even 1 percent of tax income” so, therefore, “eliminating it does not cause any type of unbearable damage to revenue.”

However, any bill would need to be sent to the Spanish Parliament for approval, where the proposals could fall foul of the congressional arithmetic and be outvoted.

Building on the moves on regional governments, the PP proposal suggests that the national government should compensate regional executives for the cost of eliminating it on a fiscal year basis.

The proposal would make up part of broader reforms to the financing system of Spain’s regions. Many of the regional governments currently cutting, subsidising or eliminating inheritance tax are headed by PP politicians voted in during the party’s sweeping victories across the country in May’s local and regional elections.

However, led by national leader Alberto Núñez Feijóo​ the PP failed to gain a majority in the following general election, held in July, and the numbers in the Spanish Parliament could mean that any proposal to implement the tax cut on a national level may be doomed before it has even got off the ground.

How does inheritance tax work in Spain?

Spain’s inheritance or succession tax is complex, changeable and long controversial.

READ ALSO: Where are the best and worst places for inheritance tax in Spain?

Spanish inheritance tax is decided by the Spanish State but all of the country’s 17 regions have the right to change these rules to make them more beneficial or detrimental to heirs. The succession tax rates will differ depending on how much is inherited, ranging from 7.65 percent on the first €7,933 up to 34 percent on €797,555+.

There are many factors to consider, such as which category heirs and other beneficiaries fall into, or the fact that in Spain the spouse of the deceased is also subject to inheritance tax, which is not the case in the UK and many other countries.

What are the different groups of heirs in Spain? There are several categories or groups that heirs can fall into and this will depend on how much allowance they can benefit from. The groups are the following:

Group 1: Children under 21 years of age
Group 2: Children over 21 years of age, spouses and parents
Group 3: Siblings, nieces, nephews, as well as aunts and uncles
Group 4: Cousins or more distant relations

Keep in mind that regional governments can and do change their inheritance tax conditions relatively often, so make sure you double-check with a Spanish source, preferably the website of your regional government. Often it can depend on which party rules your region.

In many of the regions that have recently cut or eliminated inheritance tax, doing so was a key campaign pledge. In Valencia, for example, where the PP govern in coalition with far-right Vox, the first thing regional President Carlos Mazón did when entering office was eliminate the inheritance tax.

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