Bavarian Blockade

A Tale of Two Taxes

Horst and Wolfgang don't see eye to eye. Source: DPA
Horst Seehofer (l) and Wolfgang Schaüble don't see eye to eye.
  • Why it matters

    Why it matters

    If Bavaria keeps torpedoing a reform of the fiscal solidarity system, the state will not only lose out on money but kill of one Finance Minister Wolfgang Schäuble’s prestige projects.

  • Facts

    Facts

    • Once poor and rural, Bavaria long profited from the fiscal equalization after World War II.
    • Bavarian State Premier Horst Seehofer now wants to reduce his state’s contributions to poorer regions.
    • German Finance Minister Wolfgang Schäuble would like to combine the redistribution of VAT revenues with a fiscal redistribution scheme.
  • Audio

    Audio

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Two weeks ago, it seemed as if movement was returning to deadlocked negotiations between Germany’s states and the federal government regarding the redistribution of tax revenues. But a setback occurred recently at a nighttime meeting in the chancellery in Berlin.

Horst Seehofer, the state premier of wealthy Bavaria, rejected a fundamental part of a proposal by Wolfgang Schäuble, Germany’s federal finance minister.

He opposed simplifying the fiscal equalization scheme between the federal government and the states known as the Länderfinanzausgleich. Mr. Seehofer leads the conservative Christian Social Union (CSU), which is the Bavarian sister party to Mr. Schäuble’s Christian Democratic Union (CDU).

Mr. Schäuble failed a few weeks ago with the idea of integrating the so-called solidarity surcharge into the basic income tax and thereby passing on €10 billion in tax revenue to the states each year. That proposal also went down in flames in talks between the parties in Chancellor Angela Merkel’s right-left coalition, which is made up of the CDU, the CSU and the center-left Social Democratic Party (SPD). Again, Mr. Seehofer was the naysayer.

Achieving reform in financial relations between the federal government and the states is one of Mr. Schäuble’s most important projects in this legislative period. But opposition arises repeatedly in his own camp. If it is not Mr. Seehofer who torpedoes Mr. Schäuble’s proposals, criticism comes from one of the CDU state premiers.

The solidarity surcharge was introduced after Germany’s reunification to support the economic recovery of the formerly communist East Germany. After the solidarity-surcharge integration plan was rejected in March, Mr. Schäuble proposed turning €7 billion from the federal government’s value-added-tax revenues over to the states and radically simplifying the system.

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