Landeskreditbank Baden-Württemberg - L-Bank

Revenue Equalization
While the German federal government and the individual German states have separate budgets and different
sources of revenue enabling them to carry out their respective functions and duties, a system of revenue
equalization (Finanzausgleich) is intended to ensure that each state, irrespective of its own revenues, is
sufficiently funded to fulfill its constitutional functions. This system of revenue equalization has both
“horizontal” and “vertical” aspects.
So-called “horizontal” revenue equalization (Länderfinanzausgleich), provided for in Article 107 of the
German Constitution, is intended to effect an appropriate financial equalization among financially weaker and
stronger states. The German Constitution requires the federal legislature to ensure by federal law that states
whose revenues are on the average greater than those of other states are obligated to transfer part of their tax
revenues to the financially weaker states. Horizontal revenue equalization has the effect that the financial
condition of an individual state, and thus its credit standing, is for the most part consistent with the average level
of all states.
Since Baden-Württemberg has an above-average economy in comparison with the other German states, it is
considered a “stronger” state for the purpose of revenue equalization. It is therefore obligated to make regular
equalization payments.
Articles 106, 106a and 107(1) of the German Constitution provide for the allocation, adjustments and
distribution of tax revenues between the federal government and the states (so called “vertical” revenue
equalization). In addition, they provide for special support payments from the federal government to individual
states in order to enable such states to meet financial burdens imposed by the federal government or to support
financially weaker states. Furthermore, pursuant to Article 107(2) of the German Constitution, the federal statute
implementing the “horizontal” revenue equalization may also provide for special support payments by the federal
government to financially weaker states in order to provide supplemental coverage for their general financial
needs.
The federal government and the individual states are jointly entitled to the revenues from personal income
tax, corporate income tax and value added tax. Whereas the revenues from personal and corporate income tax are
shared equally by the federal government and the individual states, the revenues from the value added tax are
prorated from time to time subject to the financial needs of the federal government and the several states.
In the event of an extreme budget emergency in any state, the constitutional principle of federal solidarity
requires the federal government and the other state governments to support, by appropriate constitutional means
such as – ultimately – financial aid, such state in order to enable it to remedy its budget emergency and to fulfill
its constitutional functions.
German Unity Fund
Pursuant to the Act of June 25, 1990 implementing the treaty of May 18, 1990, between the Federal
Republic of Germany and the German Democratic Republic, which laid the foundation for German unification in
October 1990, the German legislature established the German Unity Fund (Fonds Deutsche Einheit) to provide
financial support to the new German states. The federal government is liable for the repayment of principal of
and interest on the borrowings of the German Unity Fund. (Source: Bundesgesetzblatt (BGBl) II 1990, pp. 518
seq.)
Until December 31, 2004, for the payment of interest on such securities and borrowings, the German Unity
Fund receives contributions from the federal budget in the amount of 10% of the total borrowings outstanding at
the end of the preceding year. The 11 original German states must reimburse the federal government for 50% of
such contributions. In addition, beginning in 1995, the 11 original German states were each obligated to provide
for an additional payment in the amount of EUR 1.1 billion annually to the central government. The five new
German states are exempt from any payments. Because of low market interest rates, the total regular annual
payments were reduced from 10% in 1998 to 6.8% in 2004.
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