Royal Legislative Decree 2/2004, of 5 March 2004, which approves the revised text of the Local Tax Offices Regulatory Law, forms the basis of the local financing system. These regulations revise the legislation in time for it to include recent reforms that were instrumented through Law 51/2002, of 27 December 2002 and Law 62/2003, of 30 December 2003, for tax, administrative and social arrangement measures which have affected both financial and tax spheres. The essential issues regarding the local financing reform are the following:
- Sufficient financing for Local Corporations is guaranteed (Town/City Councils, Provincial Councils, Municipal Councils and Councils), which, for over 92% of taxpayers, has been compatible since 2003 with the suppression of Business Rates (the second most important local tax in terms of collection after Property Tax).
- Greater capacity for town/city councils to develop tax policies, they can raise or lower tax rates and establish discretionary tax benefits, i.e., greater correspondence for municipal taxes.
- A definitive financing system is designed, with the variables and appraisals that define municipal financing included in the law, in such a way that over time it becomes a stable system.
- Finally, the provinces and municipalities that are capitals of a province or Autonomous Community, or which have over 75,000 inhabitants, are assigned a part of the Personal Income Tax, VAT and special taxes on alcohol, hydrocarbons and tobacco products (approximately between 1% and 2%, depending on the tax and whether it is a municipal or provincial one). Assigning these state taxes, which is included in the financial part of the reforms, will come into effect from 2004. The so-called “tourist municipalities” (places that, although they do not comply with the requirements for accessing the tax assignment system, do, however, have a population of over 20,000 inhabitants and a greater number of second homes than first homes) are financed by participation in mixed state taxes, since, as well as participating in the general variables model, elements are included which relate to the assignment of yields from special taxes on hydrocarbons and tobacco products chargeable to these.
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