Title: States Call for Full Federal Compensation for Tax Losses from Economic Stimulus Package
Germany's Federal Government in Action
Kick starts the conversation! The states are on a mission to secure compensation for hefty tax losses incurred due to the federal government's economic stimulus package. These losses largely hit municipalities who are demanding federal aid to counterbalance their potential tax deficits from the investment program.
Chancellor Friedrich Merz, following extensive discussions with the 16 minister-presidents, agreed that municipalities need reimbursement as a fair balance for potential tax losses arising from the investment booster, scheduled for negotiating details over the weekend. The working group will propose temporary and direct relief measures so that states and municipalities can move forward with the investment booster's approval in the Bundesrat, slated for July 11.
Lower Saxony's Minister-President Olaf Lies and Saxony's Michael Kretschmer emphasized that compensation is essential for municipalities, particularly in the approval of the investment booster package featuring improved depreciation rules and a reduction in the corporate tax rate from 2028, intended to boost the lagging economy.
With the tax losses certain to hit municipalities hard, they're seeking immediate relief in the coming fiscal years, amounting to a total of approximately 48 billion euros in losses for the federal government, states, and municipalities. During the negotiations, Chancellor Merz acknowledged the dire state of municipal finances, promising to quickly determine the compensation measures taking the redistribution of value-added tax into account.
The federal government also clarified that it would implement a coalition agreement principle, securing financial compensation for any additional expenses or revenue losses for states and municipalities due to federal decisions. The offset, or financial equalization, will be provided via value-added tax points or fixed amounts, subject to proposals from a working group scheduled to submit recommendations beyond the summer break.
The federal government also guaranteed states and municipalities a fixed share of 100 billion euros in loans from the special fund for infrastructure. The loans, covered by the federal government for interest and repayment, will be distributed among states based equally on the key established in 2019 and the projected key in 2024.
Regarding municipalities' debts, Chancellor Merz indicated that discussions would take place in the fall as part of a broader tax reform. The old debts represent an obstacle for investment and affect primarily three federal states. State governments that have already resolved their old debt issues call for compensation if the federal government provides aid to other struggling states.
[1]LocalGov.eu[2]German Ministry of Finance[4]Deutsche Welle
- In the context of discussions concerning municipal financial losses due to the federal economic stimulus package, the employment policies of various levels of government might be subject to analysis and potential adjustment, as the increasing tax deficits could lead to an impact on public spending, including employment-related expenses.
- As part of the federal coalition agreement, there is a commitment to financially compensate states and municipalities for any additional expenses or revenue losses incurred due to federal decisions, such as changes in tax policies like the reduction in the corporate tax rate, which could subsequently influence local government budgets and employment-related policies.
