Focus on Germany London Office The Chandlery Office 609 50 Westminster Bridge Road GB London SE1 7QY Tel 00 44 20 77 21 87 45 Fax 00 44 20 77 21 87 46 www.feslondon.org.uk December 2006 DISTRIBUTION OF TAXES BY REGIONAL AUTHORITIES Germany has very strong and independent local authorities. This high degree of local autonomy has as a prerequisite that the local authorities have at their disposal a financial base of their own that makes them as independent as possible from higher levels of territorial administration and governance. The consequence of this is a highly complex tax system which does guarantee that local councils as well as regional governments have a sufficient income base to pursue their policies. This paper describes the basic features of this tax system. Ernst Hillebrand Introduction The tax and finance system of the Federal Republic of Germany is extremely complex. There are a multitude of financial connections between Federation, Federal States and local authorities which pay tribute to the interconnections between the various layers of governance that exist in a Federal state with strong regional and local authorities. 1 The national government(the“Federation”), the Regions and local authorities each collect their own taxes. Yet, three of the most important taxes – in total over 70% of the tax revenue – are regarded as so called community taxes: they are divided between the national government, Federal States and local authorities. Once the authorities have collected the taxes to which they are entitled, subsequent redistributions take place between the various levels. The relevant instruments for this are the“ financial equalization mechanisms ” operating between the Federal States and between the municipalities(see below) as well as levies. Therefore the tax system and the financial equalization system must be looked at as one system. Ernst Hillebrand is director of the London office of the Friedrich Ebert Foundation