Unformatted text preview: its to city states that had been censured by the
Constitutional Court. Commission on Fiscal Imbalance ♦ Second, there is an explicit regional redistribution program effected horizontally among states in a “brotherly fashion”
(Finanzausgleich proper); and ♦ Third, there are redistributive effects resulting from asymmetrical vertical grants of the federation to the states
(supplementary federal grants). 3.1. Vertical solidarity
The vertical equalization among the federation and the states is based on article 106 sections 3-9 GG. The constitution
presumes that it is possible to define “necessary expenditures” at both levels—state and central governments—which
are identified by a medium-term financial planning exercise, and to achieve a “fair compensation” (billiger Ausgleich)
between both levels of government (article 106, section 3). According to the objectives of the constitution, there is no
“vertical fiscal imbalance” in Germany as exists in other federations with exclusive tax assignments (such as Australia).
This may be considered an advantage although the political and technical implementation of this constitutional rule is
fraught with problems.
The constitution assigns half of the revenue from income taxes to both the federation and the states—with municipalities
participating in the share of personal income taxes. This rule is technically simple as the shares are given and the
horizontal apportionment of the revenue strictly follows the residence principle. However a federal law requiring the
consent of the Bundesrat governs the vertical splitting of the proceeds from VAT. VAT sharing assumes the decisive role
in securing “fairness” among the federation and its constituent states, and is therefore highly politicized. Indeed, the
states’ shares of VAT have increased considerably during the last decade reflecting the need to reach consensus with
the old states on the incorporation of the new states into the intergovernmental fiscal machinery. A compromise was
found only at the expense of the federal share in VAT.
THE STATES’ SHARE OF VAT IN PERCENT
1991-92 37.0 1993 39.0 1994 40.1 1995 44.0 1996-2000 49.5 At present, the federal share of VAT is 50.5 percent with the states cashing-in the remaining 49.5 percent of a base
adjusted for specific needs of the federation and municipalities. 3.2. Horizontal solidarity
The core of the Court’s verdict is, however, devoted to horizontal equalization with its different critical aspects. As
mentioned above, horizontal equalization proceeds in three steps:
At a first level, three quarters of VAT are apportioned to the states according to population. Another quarter is reserved
for those states that are considered “financially frail”. They receive supplementary transfers from VAT in order to bring
their fiscal potential up to at least 92 percent of the average of total state taxes per capita. 11 12
13 14 The horizontal distribution of income taxes is not without problems however. The regional di...
View Full Document