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Let's Talk About That Financial Mess
Here's the deal: The Federation, being a stubborn lad, is all too fond of designing financial projects that land a whopping bill on the states and municipalities. And the new black-red coalition isn't any different, initiating a "investment boost" for companies that ends up causing substantial tax losses for the other local authorities. The representatives from these authorities weren't shy about voicing their discontent, with even the coalition leader, Markus Söder, warning of an intense tussle in the Bundesrat.
After weeks of intense negotiations, an agreement was reached late Tuesday night – the Federation will assume the lion's share of the tax losses from the states and municipalities, as shown in the resolution paper from the high-ranking negotiating group of CDU, CSU, and SPD politicians from the Federation and the states. The municipalities' ability to keep investing has been secured, as assured by Lower Saxony's new Minister President Olaf Lies (SPD).
The stakes for cities and municipalities are massive, with estimates by the Verdi trade union giving up to 14 billion euros. The Federation will fully reimburse the municipalities' tax losses from 2025 to 2029 and at least partially compensate the states, to be implemented through a higher share of the revenues from the value-added tax. The states will receive an additional eight billion euros from the Federation's special fund for infrastructure and climate protection as compensation in the years 2026 to 2029, with one billion euros per year earmarked for a new program promoting investments in daycare centers, universities, and research institutions. The states' share in the transformation fund for hospitals will also be reduced by one billion euros per year.
Adding to the largesse, the Federation will contribute 250 million euros annually to measures by the states that lessen the burden on their municipalities through a state takeover of excessive cash credits. An additional 400 million euros per year will be provided by the Federation for donor states in the federal financial equalization, with Bavaria taking the lead.
The states have made the compensations a prerequisite for approving the "investment boost." The Bundestag is scheduled to vote on the law already by this Thursday, and the Bundesrat on July 11. Failure to strike an agreement could endanger the submission of the black-red federal budget for 2025 and the medium-term financial planning, encompassing financial implications of the tax gifts for companies, as well as other projects like the lower value-added tax for the catering industry or the hike in the commuter allowance, which also bring losses for the states.
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The "booster" is designed to entice companies into making investments, including expanded tax depreciation options for machinery and electric vehicles, along with a planned gradual decrease in the corporate tax rate from 15% to 10% between 2028 and 2032 to supercharge the economy. Torsten Lüth, the German Tax Advisors Association president, cautions that the planned relaxation of depreciation rules will primarily benefit wealthier, larger companies with experienced tax departments, leaving smaller businesses, who are essential for a thriving local economy, uncared for. What a bummer!
Despite the agreement helping to keep new craters from appearing, the precarious financial situation in numerous cities and communities remains unchanged. Trade unions share a similar view, with Verdi chairman Frank Werneke commending the agreements between the federal and state governments to mitigate looming tax shortfalls, but urging long-term solutions to make municipalities financially resilient and eliminate their underlying funding deficiencies. Werneke advocates for a more significant, permanent share of municipalities in joint taxes and a transfer of the municipalities' old debts by the federal and state governments. By adopting the principle, "Who orders, pays," the federal government could potentially dodge future financial pitfalls for cities and communities.
In the ongoing conversation about the financial situation, the agreement reached by the Federation and the states includes provisions for the Federation to reimburse the municipalities' tax losses and partly compensate the states, highlighting the intersection of finance, business, and politics. Nevertheless, trade unions like Verdi are calling for long-term solutions in the form of a more significant, permanent share of municipalities in joint taxes and a transfer of old debts, emphasizing the importance of this issue in the realm of general news.
