Last-Ditch Effort: States Urgently Seek Federal Aid for Tax Hit from Economic Boost
Germany's Federal Government in Action
In a desperate plea, states are pressuring the federal government for financial aid to cover tax losses caused by the stimulus plan, estimated at a whooping 50 billion euros. The plan, which includes corporate tax cuts and improved depreciation rules for investments, is likely to lead to substantial tax revenues being slashed from municipalities and states.
Chancellor Friedrich Merz, acknowledging the strain on local finances, has agreed to negotiations aimed at devising temporary compensation measures for affected states and municipalities. The working group, scheduled to meet over the weekend, will propose ways to temporarily cushion the tax losses.
The states and municipalities are particularly worried about bearing the brunt of the expected tax losses over the coming years, with numbers showing that municipalities may lose 13.5 billion euros, states 16.6 billion, and the federal government 18.3 billion - a total of around 48 billion euros.
Merz insists that the term 'compensation' might be misleading, as the proposed measures are designed to boost local economies, ultimately leading to increased tax revenues. The exact details of these compensation measures, including the distribution of value-added tax, are yet to be determined.
In addition to the working group, the federal government has guaranteed states and municipalities a fixed share of 100 billion euros in loans from the special infrastructure fund. The federal government will cover the interest and repayment on these loans. Regarding municipal old debts, a common barrier to investment, Merz notes that discussions are yet to take place, with the issue possibly being addressed in the fall as part of a larger tax reform.
Behind the Scenes:
- The stimulus plan primarily targets businesses, offering tax cuts and deductions for investments in equipment and electric vehicles, effective between 2025 and 2028 [1][2].
- Infrastructure investments totaling 500 billion euros over 12 years are planned to stimulate growth [3][4].
- The plan aims to increase competitiveness and economic strength by gradually lowering the corporate tax rate from 30% to approximately 25% starting in 2028 [1][2].
However, these sources do not provide details on designated compensation or reimbursement mechanisms from the federal government to states and municipalities specifically to offset their tax revenue losses caused by these stimulus measures. Traditionally, such fiscal equalization or compensation occurs through intergovernmental financial arrangements but is not detailed in the available information on the stimulus package.
If you require specific figures or mechanisms on state and municipal compensation for tax revenue losses, more specialized government budgetary or finance ministry documents will likely provide the necessary details.
In light of the anticipated losses in tax revenues for states and municipalities due to the stimulus plan, Chancellor Friedrich Merz has agreed to negotiate temporary employment and community policy measures to help offset these losses. These proposed measures, aimed at bolstering local economies, may include temporary compensation or strategies for the distribution of value-added tax, although the specifics have yet to be determined.
Meanwhile, the federal government has guaranteed states and municipalities a fixed share of 100 billion euros in loans from the special infrastructure fund, with the federal government covering the interest and repayment on these loans. However, the issue of addressing municipal old debts, a common hindrance to investment, remains to be discussed, possibly in the fall as part of a broader tax reform.
