2010 Tax Cuts: Merkel To Compromise On Compensation For German States

by Ulrika Lomas, Tax-News.com, Brussels

02 December 2009

It has recently emerged that the German government intends to yield to the demands of the federal states, in a bid to obtain an agreement to its proposed 2010 tax cut initiatives.

The government is now considering a means to facilitate access for states and local authorities to support funds contained in both economic stimulus packages.

Until now, the allocation of these funds has been determined according to strict criteria. Indeed, the funds have only been released to states and local authorities to finance new building and construction projects, and not to support existing projects.

By extending the existing guidelines, access to much-needed future resources will be facilitated at local level. German Chancellor Angela Merkel has, however, ruled out the idea of redistributing value-added tax revenue to resolve the ongoing dispute.

From 2010, the government aims to implement tax relief measures amounting to around EUR8.5bn a year. As a result of the proposals, states and local authorities are anticipating losses in revenue of an estimated EUR3.9bn.

While Social Democrat-led states have opposed the government’s plans, state leaders from within Chancellor Merkel’s own Christian Democratic Union party have also rebelled against the government, demanding compensation for expected losses in revenue – spearheaded by Schleswig-Holstein’s Prime Minister Peter Harry Carstensen.

As leaders of the coalition prepare to meet shortly for a fresh round of talks, the focus of the discussions is bound to be on how best to tame the angry states.

Time is once again of the essence, as Germany’s upper house of parliament is due to vote on the proposed tax relief initiatives for families, heirs, and businesses on December 18.

Recommended