"Demanding a Fair Share" - Federal States Insist on Compensation for Revenue Losses Due to Government Investment Policies
States in the Federation seek reimbursement for their contributions to the federal government's investment program.
The federal states are in favor of the proposed economic relief measures but insist on being compensated for their impending revenue losses. Hendrik Wüst, the Minister President of North Rhine-Westphalia, asserted in the Bundesrat, "We need these relief measures to stimulate the economy and ensure future growth. However, we must also be able to afford it." With three years of economic stagnation, states and municipalities have had to implement austere budgets.
Notably, several state leaders have stated that they cannot agree to the relief package without financial compensation. Part of the plan involves better tax depreciation options for companies acquiring machinery, equipment, and electric vehicles. From 2028, the corporate tax rate is set to decrease as well.
According to calculations from the state circle, the federal government, states, and municipalities will lose nearly 50 billion euros in taxes due to the law. The federal government suggests paying one-third of this amount, but two-thirds would fall on the states and municipalities, which the Minister President of Mecklenburg-Vorpommern, Manuela Schwesig, finds "unfair."
In the coming week, the Minister Presidents plan to meet with Chancellor Friedrich Merz to discuss a solution. Schwesig emphasized the necessity of a favorable offer from the federal government to avoid protracted mediation and to have the relief measures decided before the summer break in July.
Financial State Secretary Rolf Bösinger acknowledged a constructive dialogue on the matter, stating, "We are all going into short-term advance payments with the investment program, but later we will all benefit from more economic growth."
Historically, federal government investment plans or structural funding shifts can cause disparities among states' budgets, prompting negotiations for fair compensation[1][2]. These negotiations occur within the Fiscal Equalization System, considering aspects like annual structural net borrowing limits and compensation mechanisms[1]. Effective compensation ensures that states with higher fiscal exposure, often those with weaker own-source revenues or higher reliance on federal transfers, are shielded from disproportionate losses[2].
Source: ntv.de, dpa
[1] Overview of Federalism and Fiscal Federalism in Germany, Kiel Institute for the World Economy, 2020, Link[2] Managing Public Finances in the Federal System, OECD, 2018, Link
States with weaker own-source revenues or higher reliance on federal transfers are more adversely affected by revenue lossesCompensation mechanisms are crucial for revenue stability, sustained investment, and maintaining fiscal equityCompeting priorities and fiscal constraints complicate negotiations between the federal government and states
The federal states, particularly those with weaker own-source revenues or a higher dependence on federal transfers, are calling for compensation mechanisms to mitigate the adverse effects of revenue losses due to government investment policies, such as the proposed relief package. Moreover, vocational training programs, business growth, and fiscal equity are intertwined, as the need for financial compensation is essential to afford vocational training, stimulate the economy, and maintain a balanced business environment across the community.
