Negotiations between the political parties for the preparation of the 2026 State Budget have begun and, as usual, fiscal matters emerge as top concerns, generating red lines and behind-the-scenes maneuvering. It is unfortunate that tax decisions remain the focal point of the annual budget debate, rather than being framed by a broad partisan consensus and strong stability. Countries that have managed to achieve this, such as Ireland, create security and predictability for both investors and residents, which accelerates investment and economic growth.
Yet here we are again in the annual cycle of tax discussions. Fortunately, we enter this cycle from a position of enviable fiscal strength, with expectations of another public accounts surplus in 2025. This is a rare situation in Europe, where the clouds of a new sovereign debt crisis are gathering on the horizon, this time centered in the heart of Europe, notably France and possibly Belgium and Italy through contagion.
Although the Government is using the existing fiscal margin to negotiate targeted reductions in personal income tax (IRS) and corporate income tax (IRC) with the opposition, a broader and more strategic debate on fiscal policy would be desirable. Despite Portugal’s excellent budgetary position, supported by economic growth and rising employment, there are also clouds on the longer-term horizon. The sharp reduction of European Cohesion Funds starting in 2028, due to the end of the Recovery and Resilience Plan (in June 2026) and Portugal 2030 (in December 2027), will put pressure on the public budget, which currently relies heavily on EU funds to finance most of its investment. That investment will need to increase, driven by commitments in the area of defense, as well as higher expenditures on pensions and healthcare caused by population aging. Where will the tax revenue come from to support these future costs and investments? Even real GDP growth of 2–3% (with inflation at 2%) will not suffice.
Out of total projected state tax revenues of €63.3 billion in 2025, around 40% will come from value-added tax (VAT). Yet with standard rates at 23%, among the highest in Europe, and given that VAT is a regressive tax, it is unlikely that VAT revenue can increase significantly beyond nominal GDP growth of around 5% per year.
The second most important source of revenue is personal income tax (IRS), accounting for 26.2%. However, marginal IRS rates are already extremely high for middle and upper-middle incomes, and the trend is toward reducing IRS for specific population groups, such as young workers — and it should also extend to families with children, who currently face an enormous tax burden relative to household expenses. As a result, IRS revenue can be expected to decline as rates are reduced, as is already foreseen for this year.
Third comes corporate income tax (IRC), which represents 17% of total tax revenue. Current negotiations point toward small but progressive reductions in IRC in order to enhance fiscal competitiveness and attract business investment. IRC receipts may grow if business activity and profits expand, but strong growth will be difficult to achieve in today’s global context, especially with lower rates.
Finally, ranking fourth and fifth are excise taxes on petroleum products (ISP, 6.6% of revenue) and taxes on “consumption vices” (tobacco, alcohol, gambling, and others, 4.8%). These rates have been rising, and so have the revenues. However, the electrification of the vehicle fleet will inevitably reduce ISP, the tobacco tax rate is already extremely high, and it is not easy to expand the base of gambling taxation, an activity that increasingly involves young people in online gaming and many less-educated citizens in games of chance.
The myriad of small fees and charges generates some revenue, but not much, with the exception of stamp duty, which continues to weigh heavily on Portuguese households (€2.25 billion, or 3.5% of revenue), due to its broad base of application, imposing an additional burden on expenses charged to citizens.
The property transfer tax (IMT) has some weight in revenue terms (around €1.75 billion), but it is a municipal tax that penalizes investment in real estate assets and distorts the market, as it creates restrictions on property transactions and is easy to avoid in high-value cases by transferring companies that own properties rather than the properties themselves. As for the annual municipal property tax (IMI), levied on property owners at average rates between 0.3% and 0.45% of assessed value, it generates around €1.65 billion, with an additional IMI surcharge on higher-value properties earmarked for social security.
To raise more revenue, proposals often turn to broadening inheritance taxes (which currently generate negligible amounts) or creating wealth taxes. However, people today are mobile, and so is wealth. Millionaires and high-net-worth individuals are especially mobile and well advised. Such taxes are highly complex to collect, drive capital out of the country, and are inconsistent with the policy pursued in recent years (and rightly so) of attracting highly skilled human capital and wealthy residents. In practice, those who end up paying such taxes are ordinary Portuguese citizens who have worked all their lives and saved to secure their future, already facing effective tax rates close to 50%, and who would then be further taxed on the wealth they managed to save. This path would be both unfair and ineffective.
Then, what options remain to expand the tax base in a fair, effective, and sustainable manner? The best path would be a substantial increase in taxes on real estate assets (land and buildings). Such assets are identified, their assessed value can be updated, and they cannot move (being literally tied to the ground). IMI is in practice an annual tax applied to properties. Property values have risen sharply over the past decade, and an increase in IMI would be fair, as it would transfer economic rents from property owners who benefited from these gains to the state, which could then finance reductions in IRS for families seeking access to housing. In line with an increase in IMI rates and updated property values reflecting market conditions, the IMI base could be reduced for each household member declaring the property as their primary residence. This would ensure that most citizens would not pay more tax simply for living in their homes, except for those with more expensive properties or those using them for rental purposes, which would be fair.
Luxury housing is today a fast-growing sector. Rather than stifling this sector by creating restrictions on land purchases and expensive homes, it is more intelligent to charge a higher annual rent through property taxation. This revenue could, for example, allow municipalities to finance the construction of social housing. Naturally, IMI revenues should be shared between municipalities (with a compensation mechanism if needed) and the central state, with the Additional IMI already serving as a precedent.
In Portugal, we want a tax system that is fair (spreading costs among those who have more), effective (avoiding market distortions and supporting economic vitality), and sustainable (financing future investment needs). Such a system would involve a significant increase in real estate taxation, which could generate revenues far above current levels without distorting the economy.
Filipe Santos, Dean of CATÓLICA-LISBON