The Regional Ministry of Health of Castilla y León aims to explore how tax-benefit policies can support better health outcomes. Recent evidence shows that cash transfers and tax credits in high-income countries can improve self-rated health, reduce tobacco use, and increase take-up of health-promoting activities. This note assesses two alternative reforms designed to encourage healthier lifestyles: a regional personal income tax credit and a regional cash transfer, both reimbursing household spending on goods and services linked to healthy and outdoor activities. The note compares their fiscal cost, distributional reach, and effects on poverty and inequality, and examines a budget-constrained scenario in which eligibility is limited to lower-income families.
Strengthening financial incentives to healthy habits in Castilla y León
Abstract
Two routes to the same goal. A regional tax credit and a regional cash transfer both encourage healthy spending, but they reach different households and come at different costs.
Tax credit: lower cost, narrower reach. The tax credit costs EUR 53 million per year. It mainly benefits middle- and higher-income taxpayers, because low-income households often have little or no tax liability.
Cash transfer: higher cost, broader reach. The cash transfer costs EUR 61 million per year. It reaches lower-income families more effectively, raising disposable income by 0.8% in the first decile.
Cash transfer reduces poverty and inequality more. Both reforms have limited effects on poverty and the Gini coefficient. The cash transfer produces a slightly larger reduction: poverty falls by 0.1 percentage points and the Gini by 0.07 points.
Targeting lower-income families cuts costs sharply. Restricting eligibility to families with income below the regional median wage reduces the cost of the tax credit by 74% and of the cash transfer by 63%, while concentrating gains in the bottom half of the distribution.
The Regional Ministry of Health aims to explore how tax-benefit policies can support better health outcomes in the region. While tax-benefit policies do not form part of the traditional health-promotion toolkit, they offer strong potential by providing financial incentives for families to adopt healthy behaviours. Policymakers may use different instruments: excise taxes on unhealthy products, targeted VAT reductions on healthy goods and services, tax credits that reimburse part of related expenditures, or conditional cash transfers to families that meet defined healthy-behaviour criteria.
Several studies support this approach. A recent review found that cash-transfer programmes in high-income countries improved self-rated health and reduced tobacco use (here). An analysis of the Earned Income Tax Credit in the United States showed that an increase in tax-credit benefits raised the probability of reporting “excellent or very good” health by about seven percentage points (here). Meanwhile, a review of tax credits for health-care expenditure in Italy found that poorly targeted tax credits favoured higher-income groups rather than reducing health inequality (here). These findings highlight the importance of designing reforms carefully so that they reach the intended populations and support healthy behaviours.
This note assesses two alternative reforms designed to encourage healthier lifestyles:
The first is a non-refundable regional tax credit that reimburses part of household spending on goods and services that promote healthy living. It would operate within the income tax system, applying to both for individual and joint tax units. It would include three taxable income brackets – low, middle high – that determine the share of eligible “healthy” expenses reimbursed through the credit. The reimbursement limit would fall as taxable income rises, ensuring stronger support for lower-income families.
The second reform is a regional conditional cash transfer for the same type of expenditure. It would operate as a means-tested benefit that reimburses eligible families for expenses associated with healthy habits. As in the tax credit option, the subsidy reimbursement limits depend on three taxable income brackets, which decreases as income rises.
Box 1 describes the main design features of the two reforms.
The tax credit and the cash transfer share similar design features, including the same income brackets and eligibility rules. This alignment helps compare the two measures and isolate differences in how each channels support to families for “healthy” expenses. The cash transfer defines lower reimbursement limits for the two higher income brackets so that the fiscal cost of the reforms approximates within a marginal difference of EUR 8 million. Unlike the tax credit, which benefits only taxpayers, the cash transfer reaches families with little or no tax liability, provided they purchase the targeted goods and services.
The note compares these two approaches, highlighting trade-offs, advantages and limitations of each instrument. The analysis relies on the EUROMOD microsimulation model, using EU-SILC 2022 data combined with the 2015 Household Budget Survey (HBS). The baseline scenario reflects Spain’s 2024 tax-benefit system, with all monetary values updated to nominal terms.
The tax credit costs EUR 53 million per year, about 1% of regional PIT revenues (Table 1). Because paid taxes reduce the income used to assess eligibility for the national minimum income benefit, the tax credit has a small indirect effect: minimum income spending falls by approximately 0.6%, or EUR 0.3 million.
The cash transfer costs EUR 61 million per year. Because it is not taxable and does not interact with other parts of the tax-benefit system, it produces no indirect fiscal effects.
Source: OECD calculations using the EUROMOD J1.0+ model, EU-SILC 2022 data merged with HBS 2015.
The two options produce sharply different distributional profiles (Figure 1). About 70% of the total cost of the tax credit flows to households in the upper half of the income distribution. Households in the lowest deciles often have little or no PIT liability, so they cannot benefit from a non-refundable credit even if they incur qualifying expenditure. The distributional profile of the tax credit therefore rises steeply across the lower and middle deciles, peaking around the fifth and sixth deciles before declining for higher incomes.
The cash transfer is more progressive. It reaches families in the lowest income decile, where some households purchase qualifying goods and services but owe no tax. The sixth and seventh deciles receive the largest shares of total spending, reflecting their higher participation in the eligible expenditure categories. The share then declines gradually for higher income groups.
Distribution of the cost of the tax credit and the cash transfer across the equivalised disposable income distribution (% of total cost, by income decile)
Note: Deciles are based on equivalised disposable household income in the 2024 baseline, using the OECD modified equivalence scale.
Source: OECD calculations using the EUROMOD J1.0+ model, EU-SILC 2022 and HBS 2015 data.
Both options increase average household disposable income, but to different degrees and for different groups (Figure 2). The tax credit raises average disposable income by 0.1%, with almost no effect on the first two deciles, a gradual rise between the third and sixth deciles, and declining gains above that. The cash transfer raises average disposable income by 0.2%, with the largest effect in the first decile (+0.8%). The effect then decreases steadily across the distribution, approaching zero for the top deciles.
Both options have limited effects on poverty and inequality, given their modest scale relative to the overall income distribution (Table 3). The tax credit leaves the poverty rate unchanged at 18.2% and reduces the Gini coefficient by just 0.01 points. The cash transfer reduces the poverty rate by 0.1 percentage points, to 18.1%, and lowers the Gini by 0.07 points – seven times more than the tax credit.
These results reflect the distributional patterns described above. The tax credit delivers most of its value to taxpayers in the middle and upper deciles, who are unlikely to be in poverty and whose income gains have a limited effect on inequality. The cash transfer reaches lower-income families more effectively, producing a stronger, if still modest, reduction in both poverty and the Gini coefficient.
Note: Poverty line at 60% of median equivalised household disposable income, anchored to the 2024 baseline.
Source: OECD calculations using the EUROMOD J1.0+ model, EU-SILC 2022 and HBS 2015 data.
Governments facing fiscal constraints may wish to limit the reach of new measures while preserving their effectiveness for the most vulnerable families. This section examines what happens when eligibility for both options is restricted to families with taxable income at or below the regional median wage of EUR 21 766 per year, the median wage in Castilla y León in 2023.
Restricting eligibility reduces the cost of the tax credit by 74%, from EUR 53 to 14 million (Table 3). The cost reduction for the cash transfer is somewhat smaller (63%, from EUR 61 to EUR 23 million), because a larger share of its beneficiaries already falls in the lower income brackets under the full design.
Under these tighter conditions, average disposable income increases by less than 0.1% for both measures. The tax credit still benefits mainly households around the third and fourth deciles, since many lower-income households still lack sufficient tax liability to benefit (Figure 3). The cash transfer retains a more progressive profile, concentrating gains in the lowest deciles. These results confirm the structural difference between the two instruments: delivering support through the tax system excludes many low-income families regardless of how narrow the eligibility window is.
Note: Restricted eligibility defined as taxable income at or below EUR 21 766/year (regional median wage, Castilla y León 2023; EUR 33 000/year for joint taxation).
Source: OECD calculations using the EUROMOD J1.0+ model, EU-SILC 2022 and HBS 2015 data.
The reforms described in this note were carried out as part of the 2025 Technical Support Instrument (TSI) project “Boosting the Usage of Distributional Impact Assessments through Microsimulation”, funded by the European Union. The beneficiary authority was the Regional Ministry of Health of Castilla y León (Spain). The reforms assessed during the project implementation, including those described in this note, were for capacity building purposes only and do not necessarily reflect the official views of the beneficiary authority.
More information on Spain’s tax and benefit system is available in the OECD Descriptions of Tax and Benefit Systems.
How do taxes and benefits affect disposable household income and work incentives? Find out using the OECD tax-benefit web calculator.
More information on the EUROMOD microsimulation model: here.
Contact: Vanda Almeida (Vanda.Almeida@oecd.org), Sara Riscado (Sara.Riscado@oecd.org) and Daniele Pacifico (Daniele.Pacifico@oecd.org)
This work is issued under the responsibility of the Secretary-General of the OECD, and does not necessarily reflect the official views of OECD Member countries.
This document was produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union.
This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
Photo credits: Andrei David Stock © Shutterstock
© OECD 2026
Attribution 4.0 International (CC BY 4.0)
This work is made available under the Creative Commons Attribution 4.0 International licence. By using this work, you accept to be bound by the terms of this licence (https://creativecommons.org/licenses/by/4.0/).
Attribution – you must cite the work.
Translations – you must cite the original work, identify changes to the original and add the following text: In the event of any discrepancy between the original work and the translation, only the text of the original work should be considered valid.
Adaptations – you must cite the original work and add the following text: This is an adaptation of an original work by the OECD. The opinions expressed and arguments employed in this adaptation should not be reported as representing the official views of the OECD or of its Member countries.
Third-party material – the licence does not apply to third-party material in the work. If using such material, you are responsible for obtaining permission from the third party and for any claims of infringement.
You must not use the OECD logo, visual identity or cover image without express permission or suggest the OECD endorses your use of the work.
Any dispute arising under this licence shall be settled by arbitration in accordance with the Permanent Court of Arbitration (PCA) Arbitration Rules 2012. The seat of arbitration shall be Paris (France). The number of arbitrators shall be one.
