Boosting the Economy: States vs Federal Government
Nations seek financial reimbursement for disaster aid disbursement
Berlin - The states are on a collision course with the federal government over the financial impact of tax relief packages aimed at kickstarting the economy. Before a crucial conference in Berlin, minister-presidents from several states stated emphatically that they won't shoulder the immense burden without compensation. The CDU government heads went further, penning a letter to Chancellor Friedrich Merz (CDU), calling for a fundamental overhaul of the federal-state finances according to the principle: Who orders, pays.
This face-off started due to the planned relief package, which offers improved tax depreciation options for companies that invest in machinery, equipment, and electric vehicles from 2028, with the corporate tax rate set to decrease as well. This move threatens to cause revenue losses, primarily borne by municipalities.
Schwesig: Boosters Need Municipal Support
"If we siphon more funds from cash-strapped cities and communities, then the entire initiative will falter," warned Manuela Schwesig (SPD), Minister-President of Mecklenburg-Vorpommern. "It is abundantly clear that the 48 billion euro relief for the economy, which is certainly necessary, is not only one-third financed by the federal government and two-thirds by the states and municipalities," she said.
Alexander Schweitzer (SPD), the Governor of Rhineland-Palatinate, echoed this sentiment: "We have agreed in the coalition agreement: Who orders, pays." Their argument is further bolstered by the 100 billion euros the states are slated to receive from a debt-financed special fund for infrastructure and new debt opportunities.
Söder: Time for Action, not Negotiations
Markus Söder (CSU), the head of government of economically robust and relatively affluent Bavaria, urged his colleagues to approve the package, advocating against further budget negotiations. In his view, the long-term benefits, including additional tax revenues, outweigh the short-term losses. However, the financial landscape for states has significantly improved due to the 100 billion from the infrastructure fund and new debt possibilities. Now, it's time for states to step up and shoulder overall responsibility for Germany.
Demanding Change
The CDU minister-presidents, however, have called for a transformation in the financial relationship between the federal government and states, as outlined in a letter to Merz. While details of the proposed changes remain vague, it's clear that the states want a permanent, rule-bound, and verifiable mechanism that offers them compensation when federal laws result in increased expenditure or reduced revenue.
The states propose substantially boosting their share of the value-added tax as a means of compensation. To achieve this, they argue that the federal government should better analyze the financial implications of future laws on the states and adjust the value-added tax distribution accordingly.
The letter was signed by leaders from Saxony, Berlin, Hesse, North Rhine-Westphalia, Saxony-Anhalt, Schleswig-Holstein, and Thuringia, with Söder not among the signatories.
Recent developments highlight a growing tension between the German federal states and the federal government regarding the financial impact of new economic relief measures. The states are financially burdened by the tax losses resulting from these measures, and they are demanding immediate compensation from the federal government for these losses. In addition, the states are advocating for long-term reforms of federal-state financial arrangements to address persistent imbalances and ensure that future reforms do not further disadvantage them. Despite their demands, the CDU leadership has not yet proposed detailed new proposals for revising the federal-state financial system beyond their demands for immediate compensation.
"The states are not only demanding immediate compensation from the federal government for the financial burden caused by the economic relief measures, but they are also advocating for long-term reforms in the federal-state financial system to ensure future reforms do not disadvantage them."
"The ongoing dispute between the German federal states and the federal government centers around the financial impact of new economic relief measures, with the states claiming that the planned relief package could cause revenue losses, primarily borne by the municipalities, and demanding compensation from the federal government."
