Bavaria's Big Break: Unraveling the State Budget Exit Strategy for Söder
In a recent interview with BR, legal scholars Hans-Günter Henneke and Christoph Degenhart discussed the potential options for Bavaria to exit the Länderfinanzausgleich, or state financial equalization system, in Germany. Here's what you need to know about the ongoing debate.
The state of Bavaria, one of the wealthier regions in Germany, has been contributing a significant portion of the funds redistributed through the Länderfinanzausgleich. This system is designed to balance the distribution of income and corporation taxes, which are distributed according to the place of residence and registered office principle. The federal government centrally distributes the collected value-added tax for this purpose.
However, Bavaria's Minister President, Markus Söder (CSU), has strongly criticized the system. He argues that Bavaria pays almost everything in the equalization of financial burdens while other states pay only a fraction. Söder has expressed his desire to cancel the equalization of financial burdens and has even filed a lawsuit against it with the Federal Constitutional Court in 2023.
The decision of the Federal Constitutional Court regarding Bavaria's lawsuit is still pending. In the meantime, Bavaria has three potential options to exit the system. The first option is to wait for a decision from the Federal Constitutional Court. The second option is to change the system in agreement with the other states, but the other states have shown no interest in this. The third option is to wait for the deadline set by the Basic Law, which is December 31, 2030. If no new legal order has been enacted within five years after that, Bavaria may no longer have to pay from 2036 at the earliest.
Legal expert Henneke states that the federal financial equalization is necessary due to the burden of implementing federal legislation and financing it, particularly in the social policy area. Bavaria, being a structurally weak state, has to do a lot in this area and does not receive immediate funding for it.
Söder has also demanded a different consideration of the population numbers of the city states and a cap on the levy in the lawsuit. He has criticized the system on ZDF's Markus Lanz show, claiming that Bavaria pays more than it receives, while other states receive more than they contribute.
The imbalance in Germany's financial system is evident when we look at the history of Bavaria's involvement. From 1950 to 1986, Bavaria was a recipient state of the equalization of financial burdens and received 3.4 billion euros. Since 1993, Bavaria has been a donor state and paid out almost 9.8 billion euros in 2021.
The equalization of financial burdens is a redistribution of tax revenues between the federal states, as required by the Basic Law. Donor states like Bavaria, Baden-Württemberg, Hesse, Hamburg, and Rhineland-Palatinate receive less money, while poorer states receive more. The system is intended to ensure a fair distribution of resources and to prevent economic disparities between the states.
As the debate continues, it remains to be seen whether Bavaria will be able to exit the Länderfinanzausgleich. Complex negotiations and legal adjustments would be required for any exit, and the other states have shown little interest in changing the current system. The decision will have significant implications for the financial future of Bavaria and the rest of Germany.
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