Germany’s Reunification - The Political Geography of Inequality - page 140

TABLE 6.2. Interregional Redistribution before
Reunification, 1979-1989

Land 1979-1982 1983-1989

Baden-Wurttemberg − 1516.25 − 1621.86

Bavaria 277.33 44.67

Bremen 203.00 439.33

Hamburg − 500.25 − 172.40

Hesse − 362.50 − 1120.20

Lower Saxony 972.50 1174.00

North Rhine-Westfalia 0.00 25.83

Rhineland-Palatinate 275.67 354.25

Saarland 259.25 332.00

Schleswig-Hosltein 393.75 550.80

Author's calculation on data from Finanzbericht 1991: 112-113.
Figures in millions DM.

of the Verbundsystem, and constitutes the key mechanisms for interregional
redistribution (T) within Germany's fiscal structure. Table 6.2 provides a pic-
ture of how each of the western l ander stood in the system of interregional
redistribution (FA) in the years before the Reunification. 2
Predictably, the key practical issue is the identification of the financial
strength of each of the l ander. Two indicators serve this purpose: a measure-
ment of fiscal capacity and a measurement of fiscal need, also called compensa-
tion measurement, which is weighted according to the number of inhabitants.
The calculus of the former has been the object of an ongoing political con-
flict which included a challenge of the overall system before the Constitutional
Court by North Rhine Westphalia. Before the 1987 reform, the index of fiscal
capacity was calculated by adding a land's share of the VAT, the local corpo-
rations tax and the (federal) personal and corporate income taxes. As a result
of conflicts regarding what ought to be included in and excluded from the
calculation, especially during the period 1983-1987, a number of items were
added to the list. These included land sales, fire protection, taxes on natural
resources and extraction, and, last but not least, the effect of the local taxes in
each land. 3
Once these two indicators have been calculated, the pie is shared. The need
to guarantee a balance between richer and poorer l ander does not imply full
financial equalization among them. The FA works as a two stage process

2 Note, however, that these financial adjustments are not the only tool for fiscal equalization:
additional vertical financial transfers (Erg angzungszuweisungen), special grants in aid for eco-
nomic investment (Finanzhilfe) and structural funds created in 1988 in order to compensate for
the exclusion from the FA system of a number of growing social burdens are also meant to have
equalization effects.
3 Lander transfer money to the local councils up to a certain level. The more these collect in
revenue, the less the regional government needs to transfer to them and, therefore, the greater
their fiscal capacity.