In Spain, the fight for Catalan independence comes down to cash money by Ian Mount @FortuneMagazine January 30, 2015, 10:32 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons When the president of Spain’s Catalonia region Artur Mas recently announced that the region would hold early elections in September, his party’s spokespeople were quick to characterize the elections as a plebiscite on Catalan independence from Spain. Some 1.8 million voters in Catalonia (about 30% of the electorate) supported independence in a straw poll last November for several reasons. But one of the most common is that the central government in Madrid takes more in taxes from the wealthy region than it returns in spending. In a poll taken by the regional government last October, 80% of those surveyed agreed that the central government took too much of their tax money and made decisions that hurt Catalonia’s public infrastructure. The oft-quoted version of the sentiment is Madrid nos roba: Madrid robs us. And it is accurate…to a point. That a wealthy region pays more in taxes than it receives in federal spending is not necessarily nefarious. Governments often redistribute tax money to compress the gap between rich and poor regions. “The problem of fiscal discrimination in Catalonia is similar to what happens in a rich area of any place,” says Santiago Lago, a professor of economics at the University of Vigo. “If you take similar regions, rich areas in France or Italy or the UK, the results are very similar.” In the United States, for example, New Jersey gets only $0.88 back in federal spending for every $1 it puts in. Meanwhile, Mississippi gets $3.07, according to a 2014 study from finance site Wallet Hub. Put another way, according to Dartmouth College professor of government Dean Lacey, New Jersey, which in 2010 had an average net per capita income of almost $58,000, got shorted $3,900 per capita in federal spending. Mississippi, with per capita income of $25,000, got an extra $7,900. Lacey says these transfers compress the wealth gap between states but do not significantly reorder the states in terms of wealth. In Catalonia’s case, the regional government says that Madrid shortchanged it by somewhere in the range of €11 billion to €15 billion in 2011 (between €1,500 and €2,000 per capita), depending on how one does the calculations. The central government countered by saying the gap was only €8.5 billion. Put in those terms, Catalonia’s tax contribution falls in line with that of wealthy regions in other parts of the world. But that’s where things get tricky. For many Catalans, the complaint is not simply that Catalonia subsidizes poorer regions of Spain. Rather, it is that Catalonia does so to such an extent that many of Spain’s other regions have more resources per capita than Catalonia to spend on essential services. The redistribution of tax money in Spain doesn’t merely bridge the wealth gap between regions; it reorders the divide. “In the worst of all worlds, which we’ve had for 35 years, there has been elevated solidarity. Regions that collect 120% [of average tax revenue per capita] end up with 90% [of average government resources per capita] while others go from 70% to 110%,” says Guillem López Casasnovas, a professor of economics at Barcelona’s Pompeu Fabra University who serves on CAREC, an economics council that advises the Catalan president. According to a recent study co-authored by López, in 2012 Catalonia collected 118.6% of the national average of taxes per capita, putting it in third out of 15 regions. But after redistribution, its resources fell to 99.5%, putting it in 11th place. At the other extreme, the region of Extremadura collected 76.6% of the average in taxes, putting it in 14th place, but after redistribution it ended up with 111.8%, putting it in third. More galling to many in Catalonia is that the regions of País Vasco (Basque Country) and Navarra have a special deal that lets them keep almost all of their tax receipts instead of forwarding them to the central government. According to López, that leaves them with 40% to 60% more in resources per capita. “The government in País Vasco and Navarra has a lot more money so they have much better services: better school, better hospitals,” says Lago. “The issue of País Vasco and Navarra generates a lot of feeling of bad treatment and is very problematic.” Catalan pro-independence politicians have used the narrative of bad treatment to sell the idea that Catalonia would be better off alone. A report published by Catalonia’s regional government claims that an independent Catalonia would have more resources, to the tune of 6% of the region’s GDP. The subsequent increase in spending would then deliver a multiplier effect across Catalonia’s economy. Not everyone is convinced. Anti-independence groups claim that businesses would flee Catalonia if it seceded without first reaching an amicable divorce with Spain, which seems unlikely. One group, the Societat Civil Catalana, argues that secession would lead to the destruction of up to 447,000 jobs, 34.4% unemployment, and a loss of €20 billion in foreign direct investment. For people like López, the right solution is less dramatic than secession: a fiscal pact between the central government and the regions that demands that tax money be used for essential services and to modernize regional economies—not to offer toll-free highways and hire public bureaucrats, a common Catalan complaint about poorer regions—and that the redistribution of tax funds compress the wealth gap but not reorder the regions in terms of resources per capita. Tax-inspired secession is nothing new, of course. In 2004 and 2005, Killington tried to secede from the state of Vermont and join New Hampshire because its government said it was sending the state $20 million in taxes and getting only $2 million in aid. Killington is still part of Vermont.