The Spanish government is in ongoing negotiations regarding a plan to exempt minimum wage earners from income tax (IRPF).

The proposal put forth by the Ministry of Finance includes the creation of specific deductions designed to fully offset the tax withholding for workers earning the minimum wage.

This approach aims to avoid a 'fine-tuning' adjustment that would lead to significant jumps in marginal tax rates.

The idea is to create adjustments that do not involve raising the exempt minimum threshold, which could inadvertently lower taxes for lower-income workers.

Finance Minister María Jesús Montero indicated that this proposal would incur an annual cost of just over 200 million euros.

This cost estimate contrasts sharply with the 2 billion euros that would be required to replicate a solution implemented the previous year.

It also diverges from a legislative proposal presented by the left-wing coalition Sumar in February, which seeks a broader tax exemption for all wages up to the projected minimum wage of 2025, set at 16,576 euros, as well as tax reductions for incomes up to 21,576 euros.

Negotiations between the Ministry of Finance and Sumar, however, remain unresolved.

The Finance Ministry contends that the disagreement centers on the application period for the proposed tax benefit.

Sumar is advocating for an automatic mechanism to permanently shelter minimum wage recipients from taxation.

In contrast, the Ministry of Finance proposes that the deduction only be applicable to address this year's minimum wage increase, which would cover the difference between the 2024 and 2025 minimum wage.

Labor Minister Yolanda Díaz acknowledged that, as of now, no agreement has been reached with the Ministry of Finance.

She emphasized that the issue is not related to timeframes but rather to ensuring compliance with the ratio of at least 60% of the net average salary.

Díaz explained that maintaining the 2024 tax-exempt minimum of 15,876 euros means a portion of the new minimum wage recipients (estimated at 500,000 individuals) would start to pay income tax.

She noted that in these cases, the current marginal tax rate is 43%, meaning that the government would retain 22 euros of the 50-euro increase the recipients are due to receive each month (assuming it's distributed over 14 payments).

A report prepared by a committee of experts convened by the Ministry of Labor had already taken into account the effects of not raising the IRPF exempt minimum and suggested what the gross minimum wage in 2025 should be to fulfill the 60% of the net average salary criterion.

According to this committee, this condition could be met as long as the minimum wage was increased within a range of 3.44% to 4.41%, with the final increase set at the higher end of that range.

Minister Montero stated that the two ministries are making progress towards a consensus and expressed confidence in reaching an agreement in the near future.

The Finance Ministry has until the deadline of this Friday at 18:00 to present a veto in Congress regarding Sumar's and the People's Party's initiatives aimed at exempting the minimum wage from taxation, citing concerns over potential revenue loss.

From the outset of negotiations, the Ministry of Labor has maintained that the expert calculation range does not realistically guarantee that minimum wage earners can reach the 60% threshold due to the assumed average retention rates being significantly lower than those applicable to most of these workers, who are largely single without dependents.

In contrast, the Ministry of Finance noted that under the current system, only about 20% of workers earning the minimum wage (the aforementioned 500,000) are liable for income tax.

Most of these workers have higher exempt minimums due to having children, allowing them to avoid tax liability.