In 1976, however, King Juan Carlos de Borbon unilaterally renounced the right to name the bishops; later that same year Madrid and the Vatican signed a new accord that restored to the church its right to name bishops, and the Church agreed to a revised Concordat that entailed a gradual financial separation of church and state. Church property not used for religious purposes was henceforth to be subject to taxation, and gradually, over a period of years, the Church's reliance on state subsidies was to be reduced. The timetable for this reduction was not adhered to, however, and the church continued to receive the public subsidy through 1987 (US$110 million in that year alone).
It took the new 1978 Spanish Constitution to confirm the right of Spaniards to religious freedom and to begin the process of disestablishing Catholicism as the state religion. The drafters of the Constitution tried to deal with the intense controversy surrounding state support of the Church, but they were not entirely successful. The initial draft of the Constitution did not even mention the Church, which was included almost as an afterthought and only after intense pressure from the church's leadership. Article 16 disestablishes Roman Catholicism as the official religion and provides that religious liberty for non Catholics is a state-protected legal right, thereby replacing the policy of limited toleration of non Catholic religious practices. The article further states, however, that "The public authorities shall take the religious beliefs of Spanish society into account and shall maintain the consequent relations of cooperation with the Catholic Church and the other confessions." In addition, Article 27 also aroused controversy by appearing to pledge continuing government subsidies for private, Church affiliated schools. These schools were sharply criticized by Spanish Socialists for having created and perpetuated a class based, separate, and unequal school system. The Constitution, however, includes no affirmation that the majority of Spaniards are Catholics or that the state should take into account the teachings of Catholicism.The Constitution declares Spain a "non confessional" state, however it is not a laïque state like France or Mexico.
Government financial aid to the Catholic Church was a difficult and contentious issue. The Church argued that, in return for the subsidy, the state had received the social, health, and educational services of tens of thousands of priests and nuns who fulfilled vital functions that the state itself could not have performed at that time. Nevertheless, the revised Concordat was supposed to replace direct state aid to the church with a scheme that would allow taxpayers to designate a certain portion of their taxes to be diverted directly to the Church. Through 1985, taxpayers were allowed to deduct up to 10 percent from their taxable income for donations to the Catholic Church. Partly because of the protests against this arrangement from representatives of Spain's other religious groups and even some from the catholic religion in Spain itself, the tax laws were changed in 2007 so that taxpayers could choose between giving 0.52 percent of their income tax to the church and allocating it to the government's welfare and culture budgets. For three years, the government would continue to give the Church a gradually reduced subsidy, but after that the church would have to subsist on its own resources. The government would continue, however, its program of subsidizing Catholic schools, which in 1987 cost the Spanish taxpayers about US$300 million, exclusive of the salaries of teachers, which were paid directly by the Ministry of Education and Science.