Geoscience Reference
In-Depth Information
(Finanzministerium, Baden-Wurttemberg). In September of 1999, the German
constitutional court ruled in their favor and demanded new scales for the
FA system.
22
The decision stated that the existing Finanzausgleichgesetz (fis-
cal compensation law, in the following equalization law FAG) could be used
until the end of 2004 on the condition that the legislature would introduce
the required changes through a Maßst abegesetz (scaling law) by January 1 of
2003. Otherwise, the old FAG would be deemed unconstitutional. In addition,
the Parliament would have to pass a longer term reform on the basis of the
new scaling law by December 31, 2004. Moreover, the constitutional court
also ruled that, “horizontal fiscal compensation should lessen the differences in
financial power between the Lander, not eliminate them.” In other words, and
this is critical from the standpoint of net contributors, the FA system should not
alter l ander ranking in terms of their relative financial power. Furthermore, the
decision also stated that additional federal payments should only be given in
cases where one land is left incommensurately under the financial power aver-
age and this cannot be rectified through the regular mechanisms of the system,
a word of warning explicitly included for the new German l ander. Finally, the
legislature was to reform the weighting system based on the l ander population.
Upon the court's mandate, the federal government and the states set out
to negotiate along the guidelines established by the ruling. By June 2001 no
agreement had been reached. Schroeder decided to intervene and facilitate
an agreement by, once again, transferring the cost of reform to the federal
government (Gunlicks
2001
). Two measures were key to securing the reform:
first, the federal government guaranteed the continuation of subsidies toward
the East in the form of a new Solidarity Pact, becoming effective in 2005 after
the expiration of the one negotiated in 1993; second, from 1 January 2005
onwards the federal government would assume the reduction in the payments
made by the richer l ander. These arrangements will last until the end of 2019,
when it is expected that special aid to the East and the additional “solidarity”
income tax will both cease to apply (Finanzministerium, Bayern).
More specifically, the main implications of this reform are as follows:
1) As part of the new Solidarity Pact, the federation and the states agreed
that the former would cover the lingering costs of the German Unity
Fund. To this effect, though, the federation would keep 1.323 billion
euros on a yearly basis until 2019 out of the states VAT contingent. Of
the remaining amount, all l ander continue to receive the same amount
of VAT revenue per inhabitant for at least 75% of the VAT revenue.
The remaining share is distributed according to the financial power of
the l ander. As a result, those l ander below the average financial capacity
receive compensation to close the gap.
23
22
See Bundesverfassungsgericht, 2 BvF 2/98 of November 11, 1999,sec1-347.
23
Those states with revenues up to 97% of the mean receive transfers such that that 95%ofthe
gap is closed. Those states with revenues above 97% of the mean receive transfers such that
