Fiscal federalism tries again: higher personal income tax to overcome the regions’ ‘no’

The federalist chapter of the tax reform bill has been revived after nearly 15 months of inactivity. It is being discussed today at the Unified Conference in a bid to reach an agreement with the regions, provinces, metropolitan cities and municipalities: in other words, with those directly affected by the ‘new’ federal tax system.

To overcome the outright opposition from regional presidents and mayors, which has effectively put the reform on hold, the text is now being presented in a revised and amended form compared with the version approved by the Council of Ministers on 9 May 2025; to the extent that the legislative decree is expected tomorrow for a further reading at an ad hoc meeting of the Council of Ministers. However, the outlook on the eve of the meeting – following yesterday afternoon’s technical meeting between representatives of local authorities and senior officials from the Department for Regional Affairs and the Ministry of the Economy, alongside the Accountant General, Daria Perrotta – does not point towards an agreement.

The bone of contention, of course, is money. In a federalist system, this takes the form of local authorities’ share of central government tax revenue. The first version of the decree allocated the largest share to the Regions, converting the 5.259 billion currently transferred by the State to the national fund for local public transport into a share of personal income tax revenue. The draft proposes to allocate to the provinces a share of income tax equivalent to the motor insurance surcharge (1.8 billion from 2027, rising to 2.1 billion from 2030). In practice, this national IRPEF allocated to local authorities replaces some of their current revenue, in a mechanism that is cost-neutral for the public budget. However, in the case of local councils, there is no such revenue to replace, as mayors no longer receive central government transfers: therefore, for them, no share of IRPEF revenue is provided for.

The proposal, it was said, was flatly rejected by the regions and local authorities. The regions complain that the cost-sharing arrangement is not ‘dynamic’, as it freezes the share of personal income tax allocated to the regions in absolute terms, without taking into account the increase in the tax base over time. The latter even complain of a real risk of losing resources: because they do not receive IRPEF allocations, but see the fund for local public transport – a substantial portion of which (2.6 billion according to calculations by ANCI and IFEL) passes through the regional governments but ultimately goes to the local authorities – becoming locked in at regional level.

The new legislation enhances the financial arrangements between the State and local authorities, without, however, meeting the (costly) demands put forward by the autonomous regions.
Regionalised personal income tax (IRPEF) is extended to the non-healthcare portion of the VAT sharing scheme, amounting to €424 million per year, to funding for the free provision of school textbooks (€110 million per year) and to the single fund for the right to education (€34 million per year). It also adds the promise of a second phase, stipulating that by October 2028, i.e. during the next parliamentary term, a ‘monitoring’ mechanism will be established whereby ‘in order to take account of fluctuations in personal income tax revenue, the co-payment rates may be revised’. However, put in these terms, the contribution rate could also fall if taxable income rises, in order to balance the books. All of this, in fact, is to be implemented ‘in accordance with the balance of public finances’; with a clause that is as obvious as it is significant, which appears to rule out the possibility of additional funding from the State. The prospect offered to local authorities is even more vague, and refers to a ‘technical working group on the fiscalisation of transfers’ which has so far failed to materialise.