The Fiscal Federalism Reform and its implementation

The guiding principle of fiscal federalism is to shift public functions, services and taxation from the central government to local authorities. In concrete terms, this means decentralizing some functions to regions, provinces, metropolitan cities and municipalities.

Fiscal federalism attributes more functions and income and spending policies to local institutions closer to citizens (such as municipalities).

In parallel, these administrations acquire greater financial autonomy, particularly the power to define their income and expenses. This model aims to bring the political decision-making centre closer to citizens.

At the same time, equalization transfers are necessary to avoid that only the municipalities with high tax revenue (for example, because of citizens' higher average income) are able to guarantee more services. In the absence of such equalizations, territorial gaps could widen.

These principles became part of our legal system with the reform of Title V of the Constitution, approved in 2001. This section of our Constitution deals with the relations between Central Government and local authorities. Over the last twenty years., the institutional structure of the country has profoundly changed as regards the economic and financial relations between the centre and the periphery,

Now we analyse the acts that progressively introduced fiscal federalism in Italy, considering times and modalities.

Data

Historically, the Italian local finance system was based on tax transfers from the central government to local authorities. In this conception, the first collects the resources (for example, through taxes and duties), which subsequently allocates to the various levels of government. With fiscal federalism, instead, municipalities, provinces, metropolitan districts, and regions independently finance their activities.

7 fundamental functions provided by municipalities, from waste collection to social services.

It was a total paradigm shift that required multiple regulatory and administrative interventions, which are still being implemented—starting with the reform of the Constitution on these aspects.

2 amendments to article 119 of the Constitution which regulates the financial autonomy of local authorities, in 2001 and 2012.

These changes to the Constitution provided for:

● in 2001, within the overall reform of Title V, the attribution of financial autonomy to regions, provinces, metropolitan districts and municipalities;

● in 2012, to limit public spending, a clause was added to comply with the economic and financial constraints imposed by the European Union.

 

The 2001 reform introduced the two key principles of federalism into the legal system: fiscal autonomy and solidarity between local authorities.

The reform of Title V

The reform attributed financial autonomy to local authorities. Taxes and local taxes became the first pillar of the fiscal federalism system.

Municipalities, provinces, metropolitan cities and regions have autonomous resources. They establish and apply their own taxes and revenues in harmony with the Constitution and according to the principles of coordination of public finance and the tax system. They have shares in tax revenue attributable to their territory.

The Italian Constitution, art. 119, paragraph 2

On the other hand, as already pointed out, it was necessary to provide for a mechanism to prevent the widening of disparities. An equalization fund was established to support the "poorest" territories, the second pillar of the current economic and financial relations between the State and autonomies.

The law of the State establishes an equalization fund, with no use restrictions, for the territories with lower fiscal capacity per inhabitant. - The Italian Constitution, art. 119, paragraph 3

The constitution also establishes that these two financing channels must be sufficient to finance all the functions attributed to the local administration.

The resources deriving from the sources in the preceding paragraphs allow municipalities, provinces, metropolitan cities and regions to finance the public functions attributed to them. - The Italian Constitution, art. 119, paragraph 4

On these aspects, the Constitution sets the guiding principles, but the law of the state must provide for the detailed rules. Specifically, the redesign of the regulation on fiscal federalism began with Law 42 of 2009.

8 years between the reform of Title V and the approval of the delegated law on fiscal federalism.

Law 42/2009 gave substance to the principles of fiscal federalism through various provisions. Most important was establishing an experimental municipal rebalancing fund, subsequently replaced by the municipal solidarity fund, to implement the equalization provided for by the reform and the progressive replacement of transfers based on historical expenditure with the criterion of standard costs and expenditure needs.

The 2009 law does not enter in force immediately: its implementation needs legislative decrees.

This fundamental step for public finance in our country led to change from an allocation of resources based on expenses incurred in the past (which penalizes the local authorities that provide fewer services or spend better) to a more qualitative criterion linked to the actual needs and conditions in the area. However, this process is still being implemented and is far from being completed.

It is worth highlighting that the law approved in 2009 on fiscal federalism was a delegated law. It means that it does not contain directly implementing rules but delegates to the government the law-making authority within the limits set by the parliament.

By the delegated law, the parliament gives the government the power to regulate, through legislative decrees, a matter See "Delegated law and legislative decree"

Since 2009, 11 legislative decrees have been issued to implement the law on fiscal federalism. 70% of them were approved between 2010 and 2011, i.e. in the first three years of implementation. It is worth mentioning the decrees relating the attribution of state property to local authorities (Legislative Decree 85/2010), the definition of standard expenditure needs for municipalities and provinces (Legislative Decree 216/2010) and the harmonization of local budgets (Legislative Decree 118 / 2011).

 

Analysis

Fiscal federalism aims to bring the decision concerning the collection and use of public money closer to the local level making each administration more responsible for the resources collected directly from the municipality's citizens. However, this new system could widen territorial gaps. For example, a municipality with few resources (for example, because of residents’ low incomes) would be disadvantaged. Therefore, it is necessary to provide for adequate equalization mechanisms.

This process started with the constitutional reform of 2001 and continued with the delegated law of 2009 and the related legislative decrees. However, more than ten years after the law's approval, many aspects have yet to be implemented, as the competent parliamentary committee highlighted in its monitoring reports.

Law no. 42/2009 has remained largely unimplemented. The delegated powers have been exercised only in part, and the subsequent legislation has maintained a finance system based on transfers from the state due to a long-lasting transition phase. 

Defining the essential levels of services (Italian acronym LEP) is crucial for implementing fiscal federalism.

Fundamental aspects remained pending, such as defining the essential levels of service (Italian acronym - Lep) to implement an effective equalization of resources. They refer to civil and social rights that must be guaranteed on the national territory and represent, in other words, the minimum services offered to citizens without differences throughout the country. According to Article 117 of the Constitution, state law should define these levels.

Defining the basic levels of services is also fundamental to determine the standard expenditure needs and costs that each administration must bear. It means changing from an allocation of resources based on the expenses incurred in the past (which penalizes the administrations that have fewer services or spend better) to a more qualitative criterion linked to the actual needs and conditions in the area.

Service objectives are the first step towards "Lep".

Today standard expenditure needs are defined based on the average expenditure for the services provided by similar municipalities in terms of demographic, socio-economic and morphological characteristics. Recently, a step forward in this direction (budget law 2021, art. 1, paragraphs 791 and 792) was defining service objectives in municipalities' social services and nursery schools. Parameterizing standard expenditure needs on the service objectives goes toward a more effective and fair fiscal federalism system with a view to defining the essential levels of services.