In section A-2 and A-3 above theconstitutional allocation of revenue and expenditure responsibilities are setout. Since unlike Canada and the United States the German constitution sets outdetailed provisions for tax harmonization and collection, this section D setsout these constitutional provisions in further detail.
Article 106 [Apportionment of tax revenues]separates taxes into federal taxes, state taxes, common taxes, and municipaltaxes. Section (1) of the article specifies federal taxes and reads asfollows:
(1) The yield of fiscal monopolies and therevenue from the following taxes shall accrue to the Federation:
1. customs duties;
2. taxes on consumption in so far as they donot accrue to the Länder pursuant toparagraph (2) or jointly to the Federation and the Länder in accordance with paragraph(3) or to the municipalities in accordance withparagraph (6) of this Article;
3. the highway freight tax;
4. the taxes on capital transactions,insurance and bills of exchange;
5. nonrecurring levies on property andequalization of burdens levies;
6. income and corporationsurtaxes;
7. levies within the framework of theEuropean Communities.
Federal taxes account for roughly 17% of allrevenues in Germany. The most significant among them are excisetaxes—mineral oilstax, tobacco taxes, and alcohol taxes (excluding beer). There is provision fora federal surtax on both personal and corporate income taxes (the German UnityFund).
Section (2) of article 106 specifies statetaxes and reads as follows:
(2) Revenue from the following taxes shallaccrue to the [states]:
1. the property tax;
2. the inheritance tax;
3. the motor vehicle tax
4. such taxes on transactions as do notaccrue to the Federation pursuant to paragraph (1) or jointly to the Federationand the Lander pursuant to paragraph (3) of this Article;
5. the beer tax;
6. the tax on gamblingestablishments.
Exclusive state taxes account for 5% of allrevenues in Germany. The most significant among these are the motor vehicle taxand the property (net worth tax).
Exclusive municipal (local) taxes accountfor 7% of all revenues in Germany. Principal among these are local business tax(trade tax), the property tax and utilities charges. Municipal revenues are,however, significantly tied up in revenue sharing arrangements specified insubsequent sections of the Article.
Joint taxes (or common taxes or sharedtaxes), as noted previously in Section A, are the income tax, the corporationtax and the value added tax (VAT). Joint taxes account for the bulk of revenuesin Germany—71% of thetotal. Their distribution is specified in section (3) of Article 106. Theincome tax is shared between all three levels of government—that portion of the income taxwhich is not distributed to municipalities is to be shared equally between thefederal and state governments. The corporation tax is shared equally betweenthe federal and state governments. The distribution of the VAT is to bedetermined through negotiation and federal legislation subject to the consentof the Bundesrat, and subject to specified principle, particularly theuniformity-of-living-conditions principle mentioned previously.
Section (3) reads as follows:
(3) Revenue from income taxes, corporationtaxes and turnover taxes shall accrue jointly to the Federation and theLänder (joint taxes) tothe extent that the revenue from the income tax andthe turnover tax is not allocated to municipalitiespursuant to paragraph (5) and 5(a) of this Article. The Federation andLänder shall shareequally the revenue from income taxes and corporation taxes. The respectiveshares of the Federation and the Länder in the revenue from turnover tax [VAT] shall be determined bya federal law requiring the consent of the Bundesrat.Such determination shall be based on the following principles:
1. The Federation and the Länder shall have an equal claim against current revenues to cover their necessaryexpenditure. The extent of such expenditures shall be determined with dueregard to multi-year financial planning.
2. The financial requirements of theFederation and of the Länder shall be coordinated in such a way asto establish a fair balance, avoid excessive burdens on taxpayers, and ensureuniformity of living standards throughout the federal territory.
At present, 15% of income tax revenues isapportioned to the municipalities, leaving federal and state shares of 42.5%each.
Section (4) of Article 106 spells out theapportionment of the VAT. Vertical adjustments through shares of the VAT is thefeature of the otherwise rigid German revenue sharing arrangements whichprovides the relief valve, ensuring that any vertical fiscal gap is consistentwith constitutional principles. Section (4) reads as follows:
(4) The respective shares of the Federationand the Länder in therevenue from the turnover tax shall be reapportioned anew whenever the ratio ofrevenues to expenditures of the Federation becomes substantially different fromthat of the Länder. Ifa federal law imposes additional expenditure on or withdraws revenue from theLänder the additionalburden may be compensated for by federal grants pursuant to a federal lawrequiring the consent of the Bundesrat provided that additional burden islimited to a short period of time. The law shall establish the principles forcalculating such grants and distributing them among the Länder.
Section (5) specifies that municipalitiesare to receive a share of income tax revenues, to be determined by federallegislation requiring the consent of the Bundesrat. Section (6) specifies (a)exclusive municipal taxes as well as revenue sharing arrangements concerningthe business (trade) tax. Specifically, both the state and federal governmentsare accorded shares in business tax revenues, to be specified in federallegislation requiring the consent of the Bundesrat. At present, 80% remainswith local governments, 15% is rendered to state governments, and 5 % isrendered to the federal government. (Note: This tax was to be replaced withrevenue sharing from VAT.) The federal government shares a portion of itsrevenues from the mineral oil tax with the states in aid of regional publictransport programs.
Sections (5) and (6) read asfollows:
(5) A share of the revenue from the incometax shall accrue to the municipalities, to be passed on by the Länder to their municipalities onthe basis of the income taxes paid by theirinhabitants. Details shall be regulated by a federal law requiring the consentof the Bundesrat. This law may provide that municipalities may establish supplementary or reduced rateswith respect to their share of the tax.
(6) Revenue from taxes on real property andtrades shall accrue to the municipalities; revenue from local taxes onconsumption and expenditures shall accrue to themunicipalities or, as may be provided for by Länder legislation, to associationsof municipalities. Municipalities shall be authorizedto establish the rates at which taxes on real property and trades are leviedwithin the framework of existing laws. If there are no municipalities in aLand, revenue from taxes on real property and trades as well as from localtaxes on consumption and expenditures shall accrue tothe Land. The Federation and the Länder may participate by virtue of an apportionment, in the revenuefrom tax on trades. Details regarding suchapportionment shall be the subject of a federal law requiring the consent ofthe Bundesrat. In accordance with Land legislation, taxes on real property andtrades tax as well as the municipalities’ share of revenue from the incometax and the turnover tax may be taken as a basis for calculating the amount ofapportionment.
Section (7) of Article 106 providesexplicitly for revenue sharing between states and their municipalities ofrevenues from joint taxes. Otherwise, revenue sharing arrangements are at thediscretion of individual states.
Section (7) reads as follows:
(7) An overall percentage, of the Land shareof total revenue from joint taxes to be determined by Land legislation, shallaccrue to the municipalities or associations of municipalities. In all otherrespects Land legislation shall determine whether and to what extent revenuefrom Land taxes shall accrue to municipalities (associations ofmunicipalities).
Finally, section (8) provides forcompensation to municipalities where federal requirements place a financialburden on municipalities.
Section (8) reads as follows:
(8) If in individual Länder or municipalities(associations of municipalities) the Federation requires special facilities tobe established that directly result in an increase of expenditure or inreductions of revenue (special burden) to these Länder or municipalities(associations of municipalities) the Federation shall grant the necessarycompensation if and in so far as the Länder cannot reasonably be expectedto bear that burden. In granting such compensation due account shall be takenof indemnities paid by third parties and financial benefits accruing to theseLänder ormunicipalities (associations of municipalities) as a result of theestablishment of such facilities.
Article 108 of the Basic Law specifies theallocation of responsibilities for collecting, handling and spending taxes.States have the principal responsibility for tax administration. That is, whilethe federal government administers federal taxes, the states are responsiblenot only for administering state taxes, but also the common (i.e. shared)taxes.
There is provision to ensure uniformity intax collection and auditing.
Article 109 requires that each level ofgovernment, while autonomous fiscal units, should take into account impacts oftheir budgetary policies on the other levels. This isachieved by requiring federal legislation be passed through the Bundesrat(representing the Länder) that, in effect, approves the budgets of all three tiers.State budgetary policies must, for example, be consistent with the broader goalof macroeconomic stability.
1.Impacts on EconomicEfficiency
The German system of federal-state fiscalrelations is constitutionally anchored in the uniformity-of-living-conditionsprinciple. Article 30 [Division of authority betweenthe Federation and the Länder] confirms the paramountcy of states in the provision ofgovernment services. Equally, Articles 72 and 106(3)2 confirm the role of thefederal government in ensuring fiscal equity (if that is what may beinterpreted by uniformity-of-living-conditions).Constitutional provisions that promote horizontal equalization—both implicitly andexplicitly—provide the“glue” that binds the system together. The end result is a high degree ofuniformity in terms of public infrastructure and government services. In thisrespect the emphasis upon uniformity of living standards is much higher than inCanada or the United States.
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