Report Nº: 104618/12/2023


The income tax reduction impacts the provinces’ tax revenues. Instead of discussing compensations, this is the opportunity to reach a tax and functional coordination agreement including the distribution of tax sources and the replacement of co-participation by a Convergence Fund.

Law 23,548, called “Transitory Regime of Distribution between the Nation and the Provinces”, better known as the co-participation law, was enacted in 1988 in the particular political context at the end of Raúl Alfonsín’s administration. Its conception is to centralize tax collection and then distribute it, on a daily and automatic basis, between the national government and the provinces. The distribution is based on very arbitrary parameters and generates very perverse incentives. 

Any alteration in taxes and their distribution should be implemented through a law approved by Congress, i.e., with the participation of the provinces in the decision. However, successive national governments have applied tax modifications without going through Congress, which has led to a great deal of litigation. One of the taxes most frequently manipulated by the national government is the personal income tax. The last alteration occurred in September when pointing to the president’s election, the candidate for the ruling party raised the income tax deductible for salaried and retired persons to 15 minimum salaries. 

What impact this measure has on provincial revenues? According to the Ministry of Economy, it can be noted that:

  • In September 2023, co-participation increased in real terms by 2% with respect to the same month of the previous year discounting inflation.
  • In October 2023, the co-participation received by the provinces fell by -7% in real terms.
  • In November 2023, the drop reached -18% in real terms.  

These data show that the impact on provincial revenues of the decisions taken unilaterally by the national government is substantial. The rejection by several governors is well-founded since, without consulting them, a significant cut in their provincial revenues was executed. As expected, several provinces have already filed lawsuits against the national government before the Supreme Court, adding a new wave of legal disputes to those already pending.

In this new conflict, the strategy proposed by the government –as it has been done many times in the past– is to seek compensation to the provinces for the loss caused by the income tax reduction. One of the possibilities is to regulate that part of the tax on debit and credit transfers –currently 100% derived to the national government– be co-participated. The alternative strategy, much more disruptive, is to break with the logic of applying patches on the old co-participation law and instead sign a new tax and functional coordination agreement between the provinces and the national government. 

The agreement should contemplate improving fiscal correspondence. In other words, each jurisdiction should tend to generate the revenues it needs to finance its expenditures based on the separation of tax sources. That is, the national State should be financed with taxes on foreign trade, social security contributions, and income tax. Each province should be financed with the VAT (which absorbs provincial and municipal sale taxes) generated in its territory and the wealth tax of citizens domiciled in its territory. The co-participation should be replaced by a Convergence Fund of much smaller dimensions since it would only be destined to assist the poorest provinces. These transfers will not be “blank checks” but conditioned transfers to the implementation of a measurable development strategy.

The elections produced a profound renewal in the provincial governments. It is the first time in history that no governor is politically aligned with the president. This may be a weakness or an unprecedented opportunity to rebuild federalism. In order to take advantage of it, the easy alternative of continuing to accumulate patches must be discarded, and efforts must be concentrated on a new fiscal and functional agreement that does not need the unanimous endorsement of all the provinces. In this agreement, the Nation commits itself to perform only interprovincial functions and each province –with its municipalities– to collect taxes from its population in order to finance local development policies. 


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