I n c u r r in g d e b t Local authority budgets must be approved not only by communal

parliaments but also by the supervisory authorities of the Lander as well. Whereas the Federation and the Lander are free to finance their budgets by borrowing, subject to constitutional rules, other legal requirements and the authorization of their parliaments, the scope available to the communes for r a i s i n g f u n d s b y b o r r o w i n g is l i m i t e d a n d is s t r i c t l y m o n i t o r e d b y t h e supervisory authorities of the Lander.

T h e r e a r e s o m e s t e p s in G e r m a n F i s c a l d e c e n t r a l i z a t i o n c o n c e p t s in d i s t r i b u t i n g

e q u a l i z a t i o n g r a n t w h e r e G e r m a n y ’s c o n s t i t u t i o n g u a r a n t e e s t h a t t h e F e d e r a t i o n

a n d L a n d e r r e c e i v e a p p r o p r i a t e l e v e l s o f f u n d i n g . T h e p r o c e d u r a l r e g u l a t i o n s in t h i s regard can be divided into four phases:

1. F i r s t , t h e e n t i r e t a x r e v e n u e is d i s t r i b u t e d t o t h e t w o l e v e l s o f government - namely the Federation and all the Lander - and the

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municipalities receive a supplementary grant of revenue (vertical distribution).

2. N e x t , t h e t o t a l L a n d e r p o r t i o n o f t a x r e v e n u e is a s s i g n e d a m o n g t h e various Lander (horizontal distribution).

3. I n a t h i r d s t a g e , t h e r e is e q u a l i z a t i o n b e t w e e n p o o r L a n d e r a n d r i c h Lander (financial equalization among the Lander).

4. In addition, poor Lander also receive funds from the Federation (supplementary federal grants). The details of the individual stages

a r e s u b j e c t t o s i m p l e le g a l r e g u l a t i o n s in t h e C o n s t i t u t i o n .

^Stage 1: Vertical distribution of tax revenue The Constitution jointly allocates several particularly important taxes to

the Federation, Lander and, to a degree, the municipalities. According to the Constitution, either the Federation, the Lander or the municipalities are entitled to

t h e r e m a i n i n g t y p e s o f t a x in f u l l . I n c o m e t a x , c o r p o r a t i o n t a x a n d V A T a r e d i v i d e d between the Federation and the Lander as a whole. The municipalities are entitled to a share of the income tax and VAT. These taxes are therefore referred to as joint

taxes. The Federation receives 42.5% of the income tax, 50% of the corporation tax and 2006 around 53% (from 2007 on around 55%) of VAT. The revenue accruing t o t h e L a n d e r is 4 2 . 5 % o f th e i n c o m e t a x , 5 0 % o f t h e c o r p o r a t i o n t a x a n d 2 0 0 6

a r o u n d 4 5 % ( f r o m 2 0 0 7 on a r o u n d 4 3 % ) o f V A T . 1 5 % o f t h e i n c o m e t a x a n d

a r o u n d 2 % o f V A T a t p r e s e n t g o e s t o t h e m u n i c i p a l i t i e s . O f a ll t h e t y p e s o f t a x , income tax and VAT generate by far the most revenue (Kastrop, 2007).

The Federation receives all of the revenue from the federal taxes. The majority of t h e e x c i s e d u t i e s ( s u c h a s m i n e r a l o il d u t y a n d t o b a c c o d u t y ) a s w e l l a s t h e

i n s u r a n c e t a x a r e f e d e r a l ta x e s . T h e L a n d e r a r e e n t i t l e d to r e c e i v e a l l o f t h e r e v e n u e from Lander taxes. These include the inheritance tax, the motor vehicle tax, most t y p e s o f t r a n s a c t i o n s t a x e s (in p a r t i c u l a r , t h e r e a l p r o p e r t y t r a n s f e r t a x ) a s w e l l as some other types of taxes that generate small amounts of revenue. The municipalities receive the revenue from the trade tax, the real property tax as w e l l a s t h e l o c a l e x c i s e ta x e s . T h e F e d e r a t i o n a n d t h e L a n d e r r e c e i v e a s h a r e o f t h e t r a d e t a x r e c e i p t s t h r o u g h an a p p o r t i o n m e n t .

Stage 2: Horizontal distribution of tax revenue

A t t h e s e c o n d s t a g e , t h e t a x r e v e n u e b e l o n g i n g t o t h e L a n d e r a s a w h o l e is distributed among the individual Lander. Apart from VAT, the individual Lander

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c e n t r a l l y . I n l i n e w i t h t h e p r i n c i p l e o f s h a r i n g , t h i s t a x i s d i s t r i b u t e d t o a l l s t a t e s in which a company maintains a place of business. VAT is not distributed according to the principle of local revenue. A part of the Lander share of VAT, but not more than 25%, goes as a supplementary portion to those Lander whose receipts from the

income tax, the corporation tax and the Land taxes per capita are lower than the per

c a p i t a a v e r a g e o f a l l t h e L a n d e r . T h e d i s t r i b u t i o n o f V A T is t h u s , in i t s e l f , a f i r s t

f o r m o f f i n a n c i a l e q u a l i z a t i o n , b e c a u s e i t s p u r p o s e a n d e f f e c t is t o h a r m o n i z e t h e tax receipts of the Lander. It massively increases the amount of tax revenue that financially weak Lander receive.

Stage 3: Financial equalization among the Lander The system of financial equalization among the Lander further reduces the

d i f f e r e n c e s in r e c e i p t s a m o n g t h e L a n d e r . P o o r L a n d e r r e c e i v e a d j u s t m e n t payments. These payments have to be funded by the wealthy states. The system of financial equalization among the states ensures that fiscally weak states also have adequate financial resources to fulfill their tasks and develop their sovereignty.

A l i g n i n g t h e r e v e n u e o f t h e L a n d e r is i n t e n d e d t o c r e a t e a n d m a i n t a i n e q u a l l i v i n g

c o n d i t i o n s f o r t h e e n t i r e p o p u l a t i o n in a l l o f G e r m a n y . T h e f i n a n c i a l e q u a l i z a t i o n a m o n g t h e L a n d e r is n o t , o n t h e o t h e r h a n d , i n t e n d e d to

d o a w a y w i t h t h e i r f i s c a l a u t o n o m y a n d s o v e r e i g n t y . T h i s is w h y d i f f e r e n c e s in receipts among the Lander are only reduced and not fully compensated.

In p r i n c i p l e , a l l t y p e s o f L a n d e r a n d m u n i c i p a l i t y r e v e n u e a r e t a k e n i n t o a c c o u n t when determining the financial capacity. However, there are exceptions to this rule. This means that, ultimately, the tax revenues of the Lander and municipalities mainly flow into the financial equalization among the Lander.

In p r i n c i p l e , t h e s y s t e m o f f i n a n c i a l e q u a l i z a t i o n a m o n g t h e L a n d e r a s s u m e s t h a t t h e f i n a n c i a l r e q u i r e m e n t p e r i n h a b i t a n t is t h e s a m e in a l l t h e L a n d e r . T h i s

a s s u m p t i o n is n o t a p p r o p r i a t e in t h e c a s e o f t h e L a n d e r o f B e r l i n , B r e m e n a n d Hamburg, which are city-states. The city-states are simultaneously both cities and L a n d e r in t h e i r o w n r i g h t . T h e y h a v e a m u c h h i g h e r f i n a n c i a l r e q u i r e m e n t p e r

inhabitant than the normal Lander. Therefore, for the purposes of the equalization system, their populations are notionally increased by 35%. The exact size of the adjustment payments to a poor, fiscally weak Land depends on the amount by w h i c h its f i n a n c i a l c a p a c i t y p e r ( f i c t i t i o u s ) i n h a b i t a n t f a l l s b e l o w t h e a v e r a g e

f i n a n c i a l c a p a c i t y p e r i n h a b i t a n t . T h e d i f f e r e n c e f r o m t h e a v e r a g e is t o p p e d - u p p a r t i a l l y , b u t n o t c o m p l e t e l y . A l i n e a r - p r o g r e s s i v e t o p p i n g - l i p s c h e d u l e is u s e d to

c a l c u l a t e b y h o w m u c h t h e d i f f e r e n c e is t o p p e d - u p . Similarly, the size of the adjustment amounts which a rich, fiscally strong Land has

t o p a y d e p e n d s o n t h e a m o u n t b y w h i c h its p e r c a p i t a f i n a n c i a l c a p a c i t y e x c e e d s t h e

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a v e r a g e f i s c a l c a p a c i t y p e r i n h a b i t a n t . T h e d i f f e r e n c e f r o m t h e a v e r a g e is s k i m m e d - o f f p a r t i a l l y , b u t n o t c o m p l e t e l y . A l i n e a r - p r o g r e s s i v e s k i m m i n g - o f f s c h e d u l e is used, which is symmetrical to the topping-up schedule. To ensure the sum of the adjustment amounts correspond with the sum of the adjustment payments, the adjustment amounts are either increased or decreased by a corresponding p e r c e n t a g e . T h e r e g u l a t i o n s a r e d e s i g n e d t o e n s u r e t h a t t h e o r d e r o f t h e L a n d e r , in terms of financial capacity per inhabitant, does not change as a result of the financial equalization among the Lander. The system of financial equalization

a m o n g t h e L a n d e r f u r t h e r r e d u c e s t h e d i f f e r e n c e s in t h e l e v e l s o f t h e i r f i n a n c i a l resources.

Stage 4: Supplementary federal grants Supplementary federal grants are grants which the federal government

makes to poor Lander to complement financial equalization among the Lander. These grants are uncommitted funds and serve to meet general financial requirements. There are two different kinds: general supplementary federal grants and supplementary federal grants for special needs.

General supplementary federal grants further reduce the gap between the average financial capacity per inhabitant and that of poor Lander which still remains after

financial equalization among the Lander. General supplementary federal grants go to Lander whose financial capacity per inhabitant, after financial equalization

a m o n g t h e L a n d e r , is l e s s t h a n 9 9 . 5 % o f a v e r a g e f i n a n c i a l c a p a c i t y p e r i n h a b i t a n t . The shortfall is made up proportionally.

This means that a financially weak Land, whose financial capacity per inhabitant stands at 70% or 90%) of the average before financial equalization among the L a n d e r , h a s 9 7 V S % o r 98!/->% o f t h e a v e r a g e p e r c a p i t a f i n a n c i a l c a p a c i t y o n c e t h e

equalization and general supplementary federal grants have been applied. The

d i f f e r e n c e f r o m t h e a v e r a g e f o r t h e L a n d e r is t h e r e f o r e c o n s i d e r a b l y a n d c l e a r l y reduced overall.

Furthermore, supplementary federal grants for special needs are also granted. These serve to compensate individual poor Lander for special burdens they have to bear. The special burdens merely provide the basis and reasons for granting supplementary federal grants for special needs. The funds are not legally tied to a specific purpose. The Lander receiving such federal grants for special needs bear sole responsibility for their use.

T h e 4 s c e n a r i o s a b o v e f o r f i n a n c i a l e q u a l i z a t i o n in G e r m a n y a r e d e s i g n e d a n d

i n t e n d e d t o c r e a t e e q u a l q u a l i t y o f li f e f o r a l l G e r m a n p o p u l a t i o n ( a s m e n t i o n e d in

G r u n d g e s e tz ) . M o r e o v e r , t h e r e is s t i l l o n e s c e n a r i o l e f t t o d e v e l o p G e r m a n Federation, namely special grants fro Eastern Germany.

Currently, the eastern

receive s p e c ia 1 - n e e d s u p p l e m e n t a r y f e d e r a l g r a n t s to b u i l d u p t h e i r i n f r a s t r u c t u r e , w h i c h is s till

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66 A C r is is o r C r i ti c a l D e v e lo p m e n t

c o m p a r a t i v e l y u n d e r d e v e l o p e d a s a r e s u l t o f t h e p a r t i t i o n i n g o f G e r m a n y a n d to compensate

capacity of their municipalities. At present, these funds amount to a total of €10 billion annually and are therefore extremely important to the Lander that receive them. They form part of the

S o lid a r p a k t I I (Solidarity Pact II), which is intended to rectify the consequences of the division of Germany. These supplementary federal grants for special needs will gradually be phased out by 2019 (Bundesministerium der Finanzen, 2007).

In a d d i t i o n , t h e e a s t e r n G e r m a n L a n d e r r e c e i v e s p e c i a l - n e e d s u p p l e m e n t a r y f e d e r a l grants, worth a total €1 billion annually, to compensate for the special burdens placed on them by structural unemployment. These grants are limited until 2009. T h e r e w i l l b e a r e V i e w in 2 0 0 8 t o i d e n t i f y w h e t h e r t h e y a r e s t i l l r e q u i r e d a b o v e a n d beyond 2009 (Bundesministerium der Finanzen, 2007).

S o m e L e s s o n s o n D e c e n t r a liz a t io n a n d F is c a l D e c e n t r a l i z a t io n

D e c e n t r a l i z a t i o n [ i n c l . f i s c a l d e c e n t r a l i z a t i o n ] is a c o m p l e x p r o c e s s i n v o l v i n g heterogeneous activities and engagements never completely wanted by anybody nor controlled by anyone. The following pages will give evidence of this complexity and reveal the numerous aspects to be taken into account when dealing with decentralization.

I n c u r r in g d e b t Local authority budgets must be approved not only by communal