When Policy Worlds Collide: Tax Competition, State Aid, and Regional Economic Development in the EU

Abstract

This paper explores the relationship between tax competition, regional development and state aid control. In the 1990s, partly against the backdrop of the impact of globalisation on tax revenues, ‘unfair’ tax competition rose up the policy agenda. EU and OECD initiatives led to the amendment of various tax measures sometimes, paradoxically, enhancing their attractiveness. In parallel, the European Commission pursued an increasingly rigorous approach to disciplining regional aid — even in the most disadvantaged regions. Meanwhile, the European courts addressed the longstanding question of whether corporate tax rates set by regional authorities involve state aid. The consequence of these policy outcomes is that national governments and ‘genuinely’ autonomous regional authorities may operate more generous tax measures than those authorised under the state aid rules in the most severely disadvantaged regions. This raises important issues for EU cohesion policy, small island economies, and the relationship between EU competition policy and taxation.