Unity and Diversity: A Turbulent Journey Through Italian Fiscal Federalism

Abstract

This chapter aims to analyze, from a diachronic perspective, the relationship between Italian regionalism and Italian fiscal federalism. Within a journey that will touch upon the main stages that have outlined the “incomplete Italian fiscal federalism”, an attempt will be made to highlight how—in the peculiarity of the Italian vertical division of powers—efforts have been made to reconcile key elements of any decentralized system, namely differentiation, autonomy, equality, and solidarity. The analysis will also highlight the most recent challenge posed to this reconciliation, namely the process of implementation of the so-called differentiated regionalism as provided for in Article 116.3 of the Italian Constitution.

Although this article was conceived together, Benedetta Vimercati wrote Sects. 1, 2, and 3 and Antonia Baraggia wrote Sects. 4 and 5.

Italian Regionalism and Italian Fiscal Federalism: On the Unity and Diversity Seesaw

Today’s Italian legal and political landscape is witnessing a renewed debate on the relationship between differentiation, autonomy, equality, and solidarity and this could trigger conflicts that must find a balance that might change over time (Bognetti, 1992). Although authentically secessionist proposals have never materialized, as happened in other legal systems,¹ the difficult binomial of “unity and diversity” has returned to the center of the debate due to the attention placed on the so-called differentiated regionalism referred to in art. 116, 3 of the Italian Constitution (IC). This provision provides that additional special forms and conditions of autonomy, related to specific and enumerated legislative competences, may be attributed to other Regions by State law at the initiative of the Region concerned.

For a long time, with the exception of some failed efforts at implementing the differentiated regionalism procedure, the latter experienced a prolonged period of oblivion. Nonetheless, the sturdy demands for differentiation recently put forward by some Regions² have rekindled the discussion and turned the spotlight on the pros and cons of new forms of differentiation among the Italian Regions. This debate was further inflamed after the last election results, which delivered a right-wing majority in which some parties are strong supporters of differentiated regionalism.

However, it would perhaps be too simplistic to associate this rekindling of the debate solely with a change in the Government majority. Although certainly not indifferent, the political factor must be read in conjunction with the implications stemming from the economic crisis (2008) and the upheaval caused by the pandemic. Both these events had a huge impact not only on guaranteeing social rights but also for the institutional actors involved in providing such a guarantee and, consequently, on the vertical separation of powers in Italy. Moreover, this resurgent differentiation claim must also be read in light of the overall regionalist design, of the reform movement that led several constitutional and non-constitutional reforms (sometimes pushed by the European level), and of the consequent constitutional case law.

Why open a chapter on Italian fiscal federalism with differentiated regionalism? Besides being the most recent stage of the complex, wavering, and still unfinished path of Italian regionalism, this differentiation process also entails a reassessment of the distribution of powers between the State and the Regions. One of the main prerequisites for the implementation of differentiated regionalism is represented by the implementation of some key elements that have driven the law on fiscal federalism (2009) , which has not yet been fully implemented at least partly due to the sovereign debt crisis. Faced with a worsening crisis, the focus has shifted to the urgent and pervasive measures adopted by the national level in order to contain public spending, paradoxically casting aside the implementation of fiscal federalism.³

The way financial power and taxing power are distributed is one of the factors that contributes to defining the degree of asymmetry in federal systems (Palermo, 2018). Moreover, it embodies the cornerstone of the entire polycentric structure: public power geography is determined by the financial relations between the State and subnational entities. In turn, this is crucial to understanding to what extent rights (and especially social rights) are guaranteed in a composite state (Mortati, 1976; Rivosecchi, 2019).

That is exactly why the debate on differentiated regionalism has inflamed the opposition and brought heated remarks on the issue of equality and differentiation. The latter is a classic theme in all composite states, as old as composite states are old because equality arises as a pivotal principle of institutional pluralism. This holds true for all the multiple articulations that equality assumes in a vertical separation of powers: on the one hand, in relation to the autonomous entities (meaning equality in the relationship between the territorial autonomies and the central power) and, on the other hand, with regard to individuals as equality of citizens within a region (interpersonal equality) and equality between citizens of different regions (interterritorial equality) (Gambino, 2021).

The equality issue, assumed in close connection with the very concept of citizenship (which in Italy is seen as unitary⁴), enlivens the most antithetical doctrinal positions on the opportunity to design a vertical separation of powers (Gamper, 2021). According to some authors who are disinclined to territorial power sharing, differentiation is at its very root irreconcilable with equality. On the contrary, others argue that:

the uniformity of law does not in itself ensure the overcoming of gaps, nor the uniformity of treatment of subjective situations; and tendencies toward unification can even aggravate gaps and discrepancies and harm more (or for a greater number of citizens) the subjective situations constitutionally guaranteed. (Mangiameli, 2019, p. 1)

In summary, it could happen that uniform rules set in different contexts—especially in those where differentiation is profound and original—could accentuate disparities instead of nurturing unity (Palermo, 2018).

This tension between equality and unity, uniformity and differentiation, has been a constant of Italian decentralization since its origins.⁵ Ever since its foundation, Italian regionalism has accepted a certain degree of differentiation and of equality (in the double meaning expressed before). The degree of differentiation was required due to the profound differences featuring the Italian Regions. Italy was marked by pronounced territorial variations encompassing not only cultural and historical distinctions but also demographic, geographic, linguistic, and socio-economic differences. Many of these distinctions continue to exist today, albeit in a less pronounced manner. Similar to the experience of other nations, in Italy as well, the complex nature of the nation-state is derived from the multiplicity and diversity of integrated territories, and consequently, from the variety and diversity inherent in the communities settled in the local territories involved in the process of national unification (Nevola, 2003).

Suffice to know that a special regime exists for certain Regions (the so-called Special Regions⁶) because of some of the aforementioned differences. And this special regime is based on a different distribution of legislative and executive powers, and on a specific fiscal regime agreed by each individual Special Region with the State and regulated in Special Statutes.

Nonetheless, in a legal system that aspires to maintain unity while enhancing territorial autonomy, the question remains as to which are the privileged tools for a vertical sharing of power that is capable of protecting and improving the specific features of territories⁷ without, at the same time, sacrificing two fundamental cardinal values for Italian constitutionalism: the principle of equality and the complementing principle of solidarity (Arban, 2021; Ronchetti, 2021). Those principles are considered constitutive features of the Italian social state, unaltered and unalterable in the Italian Constitution as they are fundamental principles (art. 2 and 3 IC).

The cumbersome presence⁸ of these fundamental principles has therefore driven the advancement of our federalism and our fiscal federalism, which are not competitive but aim to develop, at least in terms of intentions, through cooperation and solidarity.

Then one grasps that it would be incomplete and improper to explore Italian fiscal federalism only in the light of the main provision setting forth the principles of fiscal federalism, i.e., art. 119 IC, one of the more amended provisions of the IC.⁹ This issue requires a broader scope of investigation, looking at the entire Title V of the IC (especially the provisions regulating the distribution of competences and the provision on state substitutive powers), at the provisions regulating the so-called fiscal constitution, and at the provisions on fundamental principles. In such an approach, one can appreciate the centrality of the principles of equality and solidarity in the definition of Italian regionalism and its fiscal federalism, also judging the outcomes.

According to this perspective, tools of solidarity have been foreseen in Italian regionalism precisely as a safety net to guarantee equality between the Regions and between their citizens, specifically to avoid a widening of the socio-economic divide that has always existed between the Northern and the Southern Regions. It is worth recalling here that the Gross Domestic Product (GDP) gap between a Southern and a Northern citizen was at 45% around the time of the COVID-19 pandemic (Banca d’Italia, 2022).¹⁰

This risk was specifically recalled to oppose the 2001 constitutional reform of Title V of the IC aimed at enhancing decentralization in the Italian regional system. The fear of further jeopardizing national social cohesion is nowadays an argument against adopting differentiated regionalism,¹¹ held up as a leverage for the transition from cooperative to competitive regionalism.

Otherwise, as the recognition of Special Regions demonstrates, there is no a priori incompatibility between differentiation and equality. In order not to create inherent incompatibility, it is important to take seriously the multiple specific situations that characterize the whole territory, and this may require a margin of differentiation. Over and above that, it is maybe even more relevant to define what kind of equality we strive for (Mangiameli, 2019).

In light of the above premises, answering some questions is crucial. How much inequality is acceptable? (Belser & Zünd, 2021). Is the measure of inequality that allows diversity but not disparity acceptable? Or is it better to raise the level of acceptable inequality?

Keeping these questions in mind, this chapter intends to reflect, in a diachronic perspective, on fiscal federalism in Italy, notably focusing on ordinary Regions. For this purpose, we will sketch out the various stages that have marked the development of Italian regionalism and its fiscal federalism. Through this reconstruction we will bring out the issues and the attempts to answer the two previous questions, trying to understand how the Italian legal system has sought to build its own fiscal federalism by reconciling two naturally dynamic principles such as those of decentralization and equality (Friedrich, 1968). In this short exploration, the focus will not only be on the provisions in the Constitution, which moreover must be read in conjunction with ordinary legislation, but also on the case law and all the external or non-institutional factors that have contributed to shape Italian fiscal federalism.

Italian Fiscal Federalism: Mild “Fiscal Regionalism” for Mild Regionalism

The dawn of Italian regionalism is certainly not characterized by a strong vertical distribution of powers. Mild regionalism—or regionalism without a model (Luciani, 1994)¹²—emerged from the debate in the Constituent Assembly, marked by a distribution of competences that restored undisputed centrality in the Italian institutional structure to the central level, using the pattern of the Napoleonic model built around a peripheral administration (Patroni Griffi, 2010).

This mild regionalism, which remained in limbo for almost twenty years due to the lack of implementation caused by “majoritarian obstructionism”, was very constrained both in terms of the attribution of functions and responsibilities, and of financial autonomy (Calamandrei, 1953, p. 129).

Financial intergovernmental relations between the State, the Regions, and the subnational entities settled in the original text of the IC could not be defined as fiscal federalism but more properly as “fiscal regionalism”—and in a sense this remains true today. Financial relations were based on a strongly centralized system in which the collection and distribution of revenues were hinged at the center.

In accordance with the principle of decentralization pursuant to art. 5 IC,¹³ art. 119 IC recognized a margin of financial autonomy for the Regions but narrowed by the forms and limits established by the laws of the Republic. Regions were assigned their own taxes, shares of state taxes, and transfers in proportion to the expenditure needs of the Regions to fulfill their functions.

Although these provisions seemingly recognize a margin of territorial financial autonomy, on closer inspection and in conjunction with the distribution of competences,¹⁴ they heavily confined regional financial autonomy (Bartole & Giangaspero, 2022). In the first place, art. 117 IC allocated the Regions few legislative powers and, in non-prominent sectors, they were also liable to be limited in the face of the national interest clause. This picture did not improve for administrative powers due to the so-called parallelism principle under which, apart from the possibility for the State to delegate others administrative competences to Regions, the IC established a correspondence between legislative and administrative functions. Regions exercise administrative powers for the same matters for which they have the power to enact laws.¹⁵ As such, administrative powers are as restrained as legislative powers.

Secondly, the power of Regions to impose taxes could not be exercised in the absence of a prior state law and regional taxes were assigned to the Regions by the State. State transfers were moreover strictly tied to purposes, and hence not bound by the effective amount and quality of the allocated functions.

Notwithstanding the circumscribed financial autonomy, differentiation and equality found a balance in the IC, which empowered the State to assign, by law, a special contribution earmarked for financing specific needs and, in particular, for enhancing the most vulnerable areas of the country (i.e., the South and the Islands). The IC embraced, following Buchanan’s teaching, the principle of equalization (Buchanan, 1950). In particular, the IC embraced a theory of interregional equalization based on the equalization of needs, so that whatever the tax revenues generated in a subnational entity, the State is required to provide sufficient resources (Giarda, 2009).

The regulatory framework on the financial autonomy of peripheral units envisaged by the IC was therefore very meager, requiring mainly the intervention of the national legislator. This feature of the Italian financial architecture, grounded in general principles that need enforcement through ordinary laws subject to both changing majorities and contingent factors, was and remains one of the weaknesses of the development of fiscal federalism (Valdesalici, 2014).

Art. 119 IC remained unimplemented until the establishment of the ordinary Regions in the 1970s. Its implementation has been thereafter entrusted to some laws and governmental decrees such as the tax reform act, law 825/1971, and, notably for local entities, the Stammati decrees (DL 2/1977 and DL 946/1977). These regulations established a state-transfer-based system of regional and local financing that centered around a pronounced centralization of taxes. Subnational entities were financially supported with a system of transfers of state resources while regional and local taxes were almost irrelevant (Paladin, 1973). Moreover, the tax reform act provides for the replacement, starting from 1973, of all local taxes with state transfers tailored on the revenue from the suppressed taxes. This provision was supposed to be transitional, pending a new regulation of regional and local finance which, however, never happened until the Stammati decrees.

The latter further complicated the framework for strengthening centralization and outlined, for local administrators, a sort of irresponsibility that is nowadays one of the most critical aspects of Italian fiscal federalism. Notably, the second Stammati decree introduced the criterion of “historical expenditure”; thus, the transfer of resources by the State to local authorities took place based on the expenditure incurred during the previous year, increased by a fixed percentage, to a greater extent for Southern entities.¹⁶

The choice of financial unification with a single taxing body distributing the revenues was rooted in the belief that it would guarantee a more efficient system, avoid abuses, and contain the imbalances between the multiple entities involved. A state-transfer-based system should have ensured adequate financing of the decentralized functions and greater homogeneity. But, at the same time, this system compressed legislative and administrative functions, which resulted in a compression of political autonomy (Gallo, 1979). Thus, this belief has been rebutted by reality, studded with absent accountability, and the inability to control debt,¹⁷ both not outweighed by a reduction of unevenness.¹⁸

This situation failed to radically change even with the season of reforms inaugurated by the Bassanini laws (in particular law 57/1997),¹⁹ which were characterized by substantial administrative decentralization with several administrative functions being transferred to the Regions. This reform as carried out with some major deficiencies, the lack of a constitutional amendment is the most notable one (Italian legal scholars talk about a reform with an unchanged Constitution) but also financial regulation is another important absentee. The transfer of functions was not accompanied by an organic revision of financial relations, with a few sporadic exceptions. Alongside the Bassanini reform, the Italian Government endorsed some measures aimed at revising the fiscal system, generally called the Visco reform.²⁰ In 1997, Legislative Decree no. 446 introduced a regional production tax (Irap), levied in all Italian Regions and paid in the region of production.²¹ The revenue from the tax is assigned to the Regions, which use this funding source for their spending (chiefly healthcare). The decree also provided for the establishment of a surtax on personal income tax (Irpef) on behalf of the Regions as well as the provision of equalization tools to adjust territorial imbalances in fiscal capacity in relation to Irap and Irpef.

It was considered essential to supplement regional revenues with equalizing transfers which should have made it possible to bring the total resources available for each region to levels that ensured homogeneous per capita spending capacity. In order to increase regional autonomy, the Regions were given their own taxes and a degree of flexibility in setting the rates (Bosi & Guerra, 2003; Circolare Ministero delle Finanze, 1998).

These elements had to embody the at least threefold intention this fiscal reform was introduced for: to simplify and rationalize the tax system; to ensure greater financial autonomy for the Regions, boosting fiscal decentralization through stimulating a federal transformation project; and to guarantee the Regions a consistent flow of resources to fund their expenditures, increasing the accountability of regional and local administrators (Commissione Parlamentare Consultiva, 1996).

The above-mentioned goals were supposed to initially be implemented through Legislative Decree 56/2000, through which the national Government redesigned the financing of the healthcare system. The decree sought the abolition of state transfers and the financing of healthcare expenditure (the largest cost at regional level) through regional own taxes and surtaxes, where the repeal of state transfers and the potential resulting territorial imbalances²² were softened by a national equalization fund based on multiple criteria, including needs, resident population, and fiscal capacity.

This first step toward more genuine fiscal federalism immediately suffered a setback. From the very beginning, state transfers were immediately reintroduced and the equalization fund was not actually implemented.

Toward an Envisaged but not Implemented Fiscal Federalism

In 2001, the legislator tried to remedy the lack of a constitutional framework that could genuinely support fiscal federalism by the significant constitutional reform of Title V of the IC. The constitutional legislator sought a federal reform, but not the establishment of a fully-fledged federal state (Groppi, 2015), which is feared as it is seen as an irreparable risk for “the unity of the state and the solidarity-based relationships that inform the Italian constitutional architecture” (Arban, 2021, p. 101).

The spirit of the reform seemed to be embodied in art. 114 IC, which states that Municipalities, Provinces, Metropolitan Cities, and Regions are recognized as autonomous bodies with their own statutes, powers, and functions. The provision was hailed as the epiphany of placing the various spheres of autonomy (over time disowned) on the same level, including the financial one found in a revised art. 119 IC. Financial relationships appeared to be undergoing an overturning of perspective. Subnational entities were considered active protagonists of their own financial autonomy, called upon to find their own resources for the exercise of their functions, partly by exploiting their tax power, in a context marked by an overall enlargement of legislative and administrative powers.

With reference to legislative powers, art. 117 IC officially lists the subject-matters reserved to the State (Sect. 2) and those reserved to concurrent competence, according to which the State has the right to determine the fundamental principles and the Regions the detailed regulation (Sect. 3). Section 4 establishes the “residual clause” under which all subject-matters not listed in the previous sections are included in the powers of regional legislators (Panzeri, 2017, p. 159). In relation to administrative competences, the principle of subsidiarity was constitutionalized, destined to supplant the principle of parallelism. Therefore, the administrative functions had to be carried out by the institutions “closest to the citizens (i.e., the municipalities) unless they are attributed to the provinces, metropolitan cities and regions, or to the State, pursuant to the principles of subsidiarity, differentiation, and proportionality, to ensure their uniform implementation” (art. 118 IC).

This enhancement of subnational autonomy was also translated into art. 119 IC—thus, in a sense, stressing the tension between unitarian and autonomist demands (Carrozza, 2010). Setting forth revenue and expenditure autonomy, the amended provision ascribes subnational authorities with independent financial resources. They set and levy taxes and collect revenues of their own, but they also share in the tax revenues related to their respective territories.

The use of the adjective “own” to qualify regional taxes is not meant to remain linked to the allocation of the taxes in the sense that the recipients of the revenues are the Regions. The entitlement to the tax is dissimilarly connected to the entitlement of the taxing power. This seems to be additionally reinforced by the terminological choice adopted, that of juxtaposing and being the word “levy” preceded by the word “set”, which suggests the possibility of making changes to structural components of the tax, including the power to create a new tax. The underlying logic that stands out in art. 119 IC is that of moving from a state-transfer-based system of regional and local financing to a system of financial autonomy wherein spending power hinges on the ability to generate revenues.

However, in designing fiscal regionalism characterized by solidarity, the reform did not remain untouched by the search for a balance between unity and differentiation, including a mix of elements of autonomy and central control. Art. 119 IC requires the national legislator to produce an ordinary law for an equalization fund, without any allocation constraints, for the sake of those territories that have lower per capita taxable capacity. Thus, it is possible to highlight a change in the equalization theory. Equalization based on needs switches to the equalization of fiscal capacities so that the state is required to mitigate or eradicate the differences between per capita territorial revenues. But it is worth noting that:

the new Constitution does not indicate the ‘extent’ of equalization, whether differences in per capita fiscal capacity are to be eliminated or only reduced. It would seem that in the presence of matters of purely regional interest, one should opt for reduction rather than for elimination. (Giarda, 2001, p. 8)

The revenues raised from the above-mentioned sources²³ will enable subnational entities to fully finance the public functions attributed to them under the new separation of legislative powers and the subsidiarity principle.²⁴ The latter is an inherently dynamic principle “capable of accentuating a given trend”—both a decentralizing and a centralizing trend—and, in a sense, it could make the distribution of powers less clear and stable (Steering Committee on Local and Regional Authorities, 1998, p. 23). This direct connection between expenditure and functions helps to mark the distance from an authentic federal system in which what is necessary for the functioning of the center would have been established as a priority, thus leaving the remainder to the peripheries, and not vice versa (Falcon, 2008).

Remaining within the scope of equality and differentiation, along with the equalization fund, art. 119 IC provides for “specific-purpose-grants for extraordinary circumstances”. In order to promote economic development, social cohesion, and solidarity, to reduce economic and social imbalances, to foster the exercise of individual rights, or to achieve goals other than those pursued in the ordinary implementation of their functions, the State is allowed to allocate supplementary resources and adopt special measures in favor of specific entities.²⁵ Given its purposes, it has been considered as a sort of “relief valve” for the system, inasmuch as it is a mechanism to compensate for the need for territorial financial resources, or to streamline measures of national relevance, whenever deemed essential by the national legislator (Astrid, 2003).

However, the mechanisms the constitutional legislator has introduced to protect unity and equality in the Regions and their citizens are not only those mentioned above. It is worth mentioning two other macro-categories of mechanisms: the first is the exclusive competence of the national legislator to define “the essential level of benefits relating to civil and social entitlements to be guaranteed throughout the national territory”, which is further safeguarded by the substitutive powers of the national Government referred to in art. 120 IC; the second is represented by the reference contained in art. 119 IC by virtue of which the Regions can set and levy taxes and collect revenues of their own, but in compliance with the Constitution and according to the principles of coordination of State finances and the tax system.

With regard to the first macro-category, the State is called upon to determine the essential level that needs to be guaranteed across the country for the protection of social and civil rights. This definition is binding for the regional governments, which are required to guarantee these essential levels, including in economic terms.

It is inherently true that the rights and the rules on competences are complementary because constitutional rights, when it comes to the distribution of competences, establish the duties of the State and the Regions. However, this holds even truer, for the essential levels of protection for social and civil rights. This complementarity can also be found in financial aspects. This is why the essential levels are strictly intertwined with regional and local financial autonomy, as their scope could affect their margin of autonomy.

Moreover, according to art. 120 IC, if the Regions are unable to guarantee essential levels, the national Government can exercise substitutive powers. This is one of the most enigmatic provisions amended by the 2001 reform. Indeed, the opaqueness of this notion gave rise to several interpretative doubts that even remained unresolved after the entry into force of the “La Loggia” law in 2003.²⁶ Nevertheless, substitutive powers have often been deployed, especially to preserve the right to health. Some Regions have been placed under receivership and repayment plans in order to redress regional deficits and restore regional imbalances in the protection of fundamental rights. The Regions under repayment plans, subscribed both by the State and by the Region, cannot implement measures that might prejudice the plan. Plans only allow the financing of the essential levels, but not of services falling outside of these levels.²⁷

The exclusive competence of the State does have the merit of seeking to protect at least a minimum level of homogeneity across Italy in guaranteeing essential levels, but it has also been the subject of some criticism. First of all, the national Parliament and Government have not yet determined all the essential levels, neither have the determined levels been kept updated.²⁸ Secondly, also in the light of constitutional case law, the essential levels constitute “a Trojan horse for the centralization of competences” (Martinico, 2011, p. 36). The exclusive competence of the State to define them has been described by constitutional judges as a transversal competence. Due to the fact that the exercise of this competence can overlap with regional competences (both concurrent and residual), it can reduce the regional margin of legislative, administrative, and financial autonomy.

Moreover, the essential levels—even when defined—have not always been able to mitigate inequalities, as demonstrated by the ongoing phenomenon of health mobility. One of the reasons for this is because they were not supported by fully implemented fiscal federalism and a consequent equalization mechanism.

Lastly, the legislative competence in defining minimum levels should be combined with monitoring based at the central level. Unfortunately, while the central level does carry out close monitoring of spending, alert, accurate monitoring of the quality of services is in short supply (Bin, 2021).²⁹

The second category of mechanisms the constitutional legislator has introduced to protect unity and equality is no less relevant. The IC establishes the parameters within which Regions can set and levy taxes and collect revenues of their own. These parameters are in harmony with the Constitution and the principles of coordination of public finances and the tax system. Both of these evoke some of the most debated aspects of the financial autonomy of subnational entities.

Coordination between multiple tiers of governance is a crucial profile in outlining any decentralized system, especially financial coordination; the way it is conceived and how stringent it is shape the spheres of autonomy of regional and local entities. In the Italian system, financial coordination is designed to ensure two cornerstones, one internal and one external: the curbing of disproportionate disparities, and compliance with European financial targets and constraints.

It is also worth pointing out that, pursuant to art. 23 IC, “No obligation of a personal or financial nature may be imposed on any person except by law”. This provision must be linked to the division of competences between the State and the Regions (Brancasi, 2006; Gallo, 2002). In terms of aspects that are exclusive to national competences, art. 117 IC indicates the legislative power for state taxation and accounting systems, and the equalization of financial resources. From the residual clause, it is also possible to infer that Regions have residual competence for regional tax systems. But it is here that the coordination issue resurfaces. Art. 117 IC establishes that the coordination of the public finances and the tax system is a concurrent competence, so that the taxing powers of the Regions must comply with the principles of coordination of the tax system defined by the state legislation (Colasante, 2017). This kind of competence has an intrinsically loose-knit nature, with moving boundaries, such that national legislation can enact detailed pieces of legislation that creep into areas of regional competence, particularly in times of economic crisis.

Albeit a wavering attitude, the Italian Constitutional Court (ICC) recalled that “it is up to the state legislator to determine the broad lines of the entire tax system and to define the limits within which the regulatory power of the State, of the Regions and of the local autonomies can be exercised”. Due to the vagueness of the constitutional framework and the nature of art. 119 IC, which is not a completely self-executing provision, the State can carve out a wide margin for maneuvering.

Thus, it is crucial to look at how Italian fiscal federalism is implemented under the renewed constitutional framework. Organic national legislation on fiscal federalism in combination with the national definition of the essential levels is a prerequisite to put into practice the principles outlined in the amended Title V. However, expectations of prompt, systematic legislation were shattered by the legislator’s silence. The ICC’s warning has fallen on deaf ears as well.³⁰

After the failure of some attempts³¹—such that some Italian legal scholars even talked about a quiescence of regional financial autonomy and described the path of Italian fiscal federalism as a stop and go process—Parliament enacted law no. 42 only on May 5, 2009 (Bartole & Giangaspero, 2022; Cecchetti, 2018). This delegated the Government to regulate fiscal federalism, in accordance with article 119 IC. If on the one side, the choice to delegate this regulation to the Government—only fixing principles and criteria—is understandable since such a regulation is so technically complex, on the other side a supplementary step in the implementation process of fiscal federalism has paradoxically tangled the process itself (Scuto, 2010; Valdesalici, 2021). Moreover, this process locked out not only the Parliament but also the Regions from a substantive decision-making process to fulfill their autonomy (Palermo and Wilson, 2013).

By moving into the substance of the law 42/2009, it becomes clear that two pillars need to be focused on here.³² The first one is the introduction of the so-called “standard costs and needs” criterion, which is supposed to boost the accountability of local and regional governments and to better streamline the expenditure process. The law requires that the criteria under which the current system is financed be gradually overcome. The historical spending criterion should have been gradually replaced with the “standard costs and needs” criterion, under which the transfer of resources is no longer tied to the resources spent in the previous financial period. They are rather “linked to pre-defined benchmarks as well as generally applied and neutral indicators that should make it possible to standardize territorial costs and needs”.

In order to trigger the new criterion, some steps are required to be taken satisfying a chronological but overall logical order. Once again, and even more important is the need for the preliminary definition of the essential levels of services on the basis of which the standard needs can be estimated, thus also obtaining the standard costs.

However, while this process has been launched for local entities (municipalities and provinces), these principles have not yet been adopted at regional level; in 2010, the Government enacted decree 216 regulating the move to standard needs for local entities, while decree 68 in 2011 merely “sets the premises” for defining the standard costs in the health sector.

The second important principle enshrined in law 42 is the equalization fund, linked to the previous one. The standard costs and needs criterion, whenever appropriately implemented, can indeed foster the solidarity principle and its preeminent tool, i.e., the equalization fund (Antonini, 2014). While the standard needs are connected with essential levels of services and the protection of fundamental rights, the coverage of all other financial needs mostly relies on the instruments of regional tax autonomy. For both these expenditures, in order to equalize the different fiscal capacities of the Regions, an equalization fund is envisaged. The aim of the fund is to rebalance the differences between tax capacities. The latter are based on the revenue a Region is potentially able to collect through own revenues, given the taxable amount and the statutory rate.

According to some scholars, this equalization fund cannot be considered an expression of either a vertical equalization system or a horizontal one. It could more accurately be defined as a “spurious model”. It seems to be “formally vertical” because it is based on a national fund. Nonetheless, the horizontal side can be seen in the fact that it does allow distribution among only some Regions, even though it is fed by all the Regions, in proportion to their respective fiscal capacities (Rivosecchi, 2009).

State-Region Relationship with the Lens of the ICC Case Law During the Economic Crisis

The story of the implementation of the Italian fiscal federation intertwined with the outbreak of the economic crisis that between 2008 and 2012 characterized the global economic context and Europe in particular. While Italy cannot be included on the list of “bail-out” states, i.e., the States that received financial assistance under conditionality regime, the crisis had a huge impact on the Italian legal and constitutional order and, even without formal “conditionality”, the Italian Government was prompted by the famous European Central Bank letter to adopt several reforms, including public-sector cuts, changes to the pension system, and, in the realm of social rights, measures to ensure the necessary financial resources to avoid default.³³ These measures affected also, in a significant way, the relationship between the State and Regions in the realm of fiscal policies. This is particularly evident if we examine the case law of the Italian Constitutional Court during the economic crisis.

We can identify three main drivers of the case law during the economic crisis: the long-standing non-implementation of Law n. 42/2009, the introduction of austerity policies, and the constitutionalizing of the balance budget rule in 2012.

The case law analysis will follow these three critical aspects of Italian fiscal federalism in times of economic crisis.

The non-implementation of Italian fiscal federalism has been a common argument deployed by the ICC in a series of decisions dealing with the tensions between the regions autonomy and the state will to guaranties certain standards of services and to fulfill unitary goals, especially during the economic crisis, which can be considered a lens for looking at the State-Regions relationship, although in exceptional times.

The joint effect of both the non-implementation of Law no. 42/2009 and the economic crisis has led to a process of centralization of power in the hand of the State, whose intervention is permitted in all the cases where “it responds to the need to ensure a uniform level of enjoyment of the rights protected by the Constitution itself” (ICC 2011, no. 232). In several cases (judgment no. 121 of 2010, judgment no. 232 of 2011), the Court has upheld the State intervention configured as “a temporary consequence of the persistent failure to implement art. 119 Cost. and of imperious social needs, also induced by the current serious national and international economic crisis” (judgment no. 121 of 2010). All these factors are considered by the Court sufficient justifications to legitimize the intervention of the State even when it limits the legislative competence of the Regions in the field of local public transport, in order to ensure a uniform level of enjoyment of the rights protected by the Constitution itself.

Another powerful tool which had a centralizing effect, expanding the areas of intervention of the State, has been the concept of the “coordination of public finance”, a transversal matter which endorsed the introduction by the State legislator of very specific constraints for the containment of the public expenditures of regions and local authorities (ICC judgments no. 23/2014 and no. 198/2012). The coordination of public finance has become a pervasive tool deployed by the State and endorsed by the Constitutional Court: as the ICC clearly states in decision no. 64/2016, the finance of the Regions (omissis) and local authorities is part of the enlarged public finance and, therefore, the State legislature may legitimately impose on the Regions and local authorities, for reasons of financial coordination linked to national objectives, also conditioned by European obligations, constraints on budgetary policies, even if these inevitably result in indirect limitations on the spending autonomy of local authorities. The limitations, however, are legitimate only if they leave the Regions the autonomy on resource allocation and if they are temporary in nature (Gallo, 2018).

Moreover, in several cases the ICC ruled on the constitutionality of austerity measures impinging on fiscal federalism and social rights.³⁴ As noted, by Tega, the ICC rulings on the financial crisis measures in 2012 and 2013 show a very cautious, and sometimes ambiguous stance: on the one hand, the Court states that constitutional values such as equality, solidarity, and local government’s autonomy must be reasonably balanced with economic concerns; on the other hand, the Court “keeps these concerns in high consideration and scrutinizes each austerity measure on a case by case basis, taking into account its specific features and effects” (Tega, 2014, p. 75).

The ICC upheld State legislation safeguarding the most vulnerable, despite the lack of competences (see Decisions no. 80/2010 and no. 62/2013). In this jurisprudence the ICC highlighted the pivotal role of the State’s duty to protect the inalienable core of human dignity. Where the State legislates to protect situations of extreme need, even without an express remit to do so, its conduct can be justified in light of the fundamental principles set out in Articles 2³⁵ and 3 of the Italian Constitution.

In sum, with regard to the relationship between the State and regional governments, the economic crisis has heralded a new centralism in the name of the scarcity of resources, through the concepts of the “coordination of public finance” and that of a “minimum standard of essential services”, both are seen as State prerogative.

Toward a New Season of Italian Fiscal Federalism?

A new season for the Italian regionalism seemed to be opened by the implementation of the above-mentioned “differentiated regionalism”, a process provided by art. 116 c. 3 of the Italian Constitution as amended by the constitutional law n. 3 of 2001. Art. 116 c. 3 of the Constitution provides that Regions with ordinary statute can be granted further forms and particular conditions of autonomy, limited to certain matters, in compliance with the principles referred to in article 119 of the Constitution (Rivosecchi, 2022). This provision, which aims to introduce a certain degree of asymmetry in the Italian system, has not been concretely triggered so far.³⁶

More in general, the Italian example has been defined a “non-model”, since we cannot identify a clear path toward the realization of the federal or even regional principle.

However, more recently the topic has gained momentum, especially after the draft proposal for the implementation of art. 116 c. 3 advanced by the Minister for Regional Affairs, Calderoli. We cannot analyze in detail the overall proposal, which entails different aspects of both substantive and procedural nature; what seems particularly relevant for the topic of fiscal federalism is the link between the process of differentiated autonomy and the knot of fiscal resources and equalization mechanisms, or in other word the tension between asymmetry and unity (Bin, 2008).

The draft proposal urges in particular to define the so-called essential level of services (hereinafter LEPs) concerning civil and social rights that must be guaranteed throughout the national territory. The LEPs represent the expenditure threshold which is necessary to guarantee the uniform access to basic and fundamental services, in order to make rights effective, despite local and regional differences. The definition of the LEPs is a competence exercised by the State and represents an essential element for the transparent development of financial relations between the State and territorial authorities, and the delay in defining them is an obstacle not only to the full implementation of the financial autonomy of local authorities, but also to the full overcoming of territorial gaps in the enjoyment of social rights benefits.

Another fundamental step to avoid that the implementation of differentiated autonomy will create and foster further inequalities among the regions, and therefore among citizens in the access of certain fundamental services, is the introduction of equalization mechanisms in art. 9 of the draft proposal. It is not by chance that art. 116 c. 3 IC itself refers to the principle of art. 119 IC, which provides for the establishment of an equalization fund for the territories with limited fiscal capacity. Asymmetry and equalization are thus the two pillars for the realization of a sustainable differentiated model of federalism/regionalism.

To this regard, we argue that the full realization of fiscal federalism is a pre-condition for the sound implementation of the differentiated regionalism. That’s why, given the rise of the debate over differentiate regionalism, even the implementation of fiscal federalism seems more promising than ever.

This is even truer if we consider that the realization of fiscal federalism is now one of the milestones required by the Italian Recovery and Resilience Plan (PNRR), to be implemented by 2026. The Recovery Fund itself has as a primary objective the reduction of the territorial gap among the regions and the realization of social cohesion. To this regard, it is worth noting that 40% of the Recovery Plan’s resources are destined to the Regions of Southern Italy, historically more disadvantaged than the regions in the North.

It is of course too early to assess the impact of the differentiate regionalism and of the PNRR on fiscal federalism and to predict if a full implementation of the financial rules between the State and Regions will ever take place. However, current circumstances, both internal and external, represent an unique window of opportunity for the definition of a sound system of State-region fiscal relations which is able to temperate the value of asymmetry and diversity, with the principle of unity: a difficult but necessary equilibrium in order to create a sustainable and a better defined system of State-Region financial relationship.