Resolving Financial Strains: A Fair Deal for States and Localities on Tax Losses
Federal government should provide financial aid to alleviate tax deficits faced by states and local governments - The National Government will alleviate the financial burden on the States and Local Administrations by assuming their tax responsibilities.
On a heated Wednesday afternoon, Friedrich Merz finally sat down with the state leaders. The conference revolved around a single, contentious issue: the reimbursement needed by the states to cover tax losses caused by the tax reduction policies planned by the federal government. These plans come in the form of the so-called investment booster, which would increase depreciation for businesses from 2025 to 2027. The states fear an estimated 30 billion euros in losses for both them and the municipalities.
Post-meeting, Merz stated, "We understand the tough scenario our states and local communities are dealing with. We're well aware that this economic shift translates into losses for the federal government, the states, and the municipalities." He continued, "We're up for a major battle and need solidarity among the federal government, states, and municipalities to tackle this issue head-on. We'll keep discussing this aggressively over the coming days."
- Friedrich Merz
- Local Communities
- Fiscal Relief
- Tax Cuts
- CDU
- Berlin
- Michael Kretschmer
- Federal Government
A Look Behind the Scenes:
The recently proposed relief measures by the German federal government for states and localities, chiefly tied to the investment booster and increased depreciation for businesses, form part of a broader tax reform and stimulus initiative.
Core elements of these proposals include:
- Investment Booster: The government is advocating for a special depreciation allowance named the "investment booster" that applies to business investments made from mid-2025 through the end of 2027. Businesses can log a 30% accelerated depreciation for eligible investments made between June 30, 2025, and January 1, 2028, to encourage capital investments and stimulate economic growth.[4]
- Enhanced Depreciation for Companies: There are proposed increased depreciation allowances, most notably a 75% immediate write-off for companies purchasing electric vehicles in the year of acquisition. This measure is intended to drive eco-friendly investments while offering tax relief through faster write-offs.[4]
- Corporate Tax Rate Reduction: The proposals suggest a phased reduction of the corporate tax rate from the current 15% down to 10% by 2032, accomplished in five sequential steps. This move aims to enhance Germany's competitiveness and foster investment.[4]
- Fiscal Impact and Relief Distribution: The tax cuts, including the investment booster and enhanced depreciation, are estimated to provide cumulative tax relief of around €11.3 billion by 2029. However, these measures will also create tax revenue shortfalls projected to reach €17 billion by 2029, with the resulting losses shared by federal, state, and municipal governments.[4]
In essence, the federal government plans to encourage investment by way of an accelerated depreciation "investment booster" that covers a 30% write-off, as well as increased rates of depreciation, particularly for green investments such as electric vehicles. Furthermore, a gradual reduction in corporate tax rates is proposed. These tax modifications will deliver substantial relief to companies but result in substantial fiscal losses to be divided between federal, state, and local governments, provoking discussions on how best to compensate states and municipalities for these losses effectively.[4][3]
Although the recent German economic stimulus packages and legislative drafts place emphasis on tax incentives, including investment incentives and changes to tax law, the federal government's plans also include broader reforms like amendments to tax criminal law and compliance rules, adding to the overall fiscal policy landscape but not directly related to COVID-19 or the investment incentive arrangements.[3]
In short, the federal government plans to stimulate investment through accelerated depreciation, green investment incentives, and tax rate reductions. These tax measures will bring meaningful relief to companies, but will lead to significant revenue shortfalls, necessitating discussions on fair compensation for states and localities.[4][3]
In the absence of an explicitly detailed federal relief package aimed at offsetting the tax revenue losses for states and municipalities in the current sources, such relief measures or compensatory mechanisms will likely be at the heart of ongoing fiscal negotiations.
- Friedrich Merz and the federal government must work together with local communities to find a fair finance solution for compensating states for estimated tax losses amounting to 30 billion euros due to the tax reduction policies.
- The ongoing political discussions revolve around the reimbursement needed by the states and municipalities, particularly considering that the proposed tax reform and stimulus initiative, including the investment booster and increased depreciation for businesses, will lead to significant fiscal losses for all levels of government.
