HOW TO RETURN TAX AUTONOMY TO THE PROVINCES

The main challenge for the coming years is to ensure that the achievements in terms of stabilization have continuity in a sustained process of economic development. For this reason, the main proposal put forward by President Milei, in his speech for his first year in office, is to return tax autonomy to the provinces. This is an essential transformation in order to promote a better functioning of the public sector, a necessary condition to increase investment, production and employment.  

At present, the co-participation law enacted at the end of Alfonsín’s government is still in force, with a clear vocation of transitory nature. With co-participation, the Nation is in charge of collecting national taxes and assigning them to a common pool (co-participation mass) to be distributed between the Nation and each province according to fixed parameters (co-participation coefficients). What the President proposes is to return to the scheme originally foreseen in the Constitution, which consists of each jurisdiction collecting taxes from its inhabitants to finance its public spending.

The question is how to put into practice the idea of tending to the self-financing of the provinces without generating traumatic situations. To answer this question, it is useful to analyze how much VAT and Income Tax, the two main national taxes, are collected and distributed. According to the Ministry of Economy, for 2024, it is observed that:

• VAT collects 6.7% of GDP and 3.1% is distributed to the Nation and 3.6% to provinces. 
• Income tax collects 4.3% of GDP, with 1.6% going to the Nation and 2.7% to the provinces.
• Between VAT and Income Tax, approximately 11% of the GDP is collected, of which the Nation appropriates 4.7% of the GDP and the provinces 6.3% of the GDP.

These data show that it would be possible to return tax autonomy to the provinces by establishing that the totality of Income tax would be appropriated by the Nation and the totality of VAT by the provinces. Thus, the Nation would receive the 4.3% of the GDP collected by the tax authorities, which is similar to the 4.7% it currently receives through co-participation, and the provinces would receive the 6.7% of the GDP collected through VAT, which is similar to the 6.3% they currently receive through co-participation. 

In the distribution of the VAT among each province, the rule should be similar to the one that the provinces themselves chose to allocate the gross income tax. That is, each province keeps the VAT generated in its territory and, when it is an interprovincial sale, half of the VAT is assigned to the province of origin and the other half to the province of destination. Under this scheme, it is easier to unify VAT with provincial sales tax and municipal sales tax. Obviously, this “super VAT” would be higher than the current 21%, but this is simply to make explicit the current tax burden arising from the sum of VAT plus gross income plus municipal taxes. The administration of the “super VAT” should continue in charge of the ARCA, but on behalf of the provinces, and applying the new distribution rule.

Under this scheme, the need for a co-participation regime disappears, since each jurisdiction will be financed with the taxes generated by the economic activity of its territory. For the most backward provinces in the north –which currently have no self-financing capacity– a traumatic situation can be avoided by guaranteeing the continuity of the resources they currently receive through a Convergence Fund during the transition. The main difference with co-participation is that the Convergence Fund involves a much smaller mass of resources –since it is focused only on the lagging provinces– and the transfers are conditioned to the requirement that they are not used for clientelism –as occurs with co-participation– but to narrow the development gap.

Concentrating tax collection in a bag and then distributing it through co-participation is a deviation from the original design of the Constitution, which resulted in the misconfiguration of the federal regime. Therefore, it is a priority to reestablish the principle –validated by the theory of public finances– of fiscal correspondence. That is the jurisdiction that decides the expenditure collects the tax to finance it and is accountable for it.