Giving a breather to the states and municipalities on tax burdens from the federal government
Federal government ought to alleviate tax deficits faced by states and local authorities. - The National Government Plans to Alleviate States and Local Governments from Tax Responsibilities
Last Wednesday, Friedrich Merz sat down with the state leaders for a crucial meeting. The main point of discussion was the compensation the states are demanding from the federal government for the financial hit they'll take due to the tax cuts proposed by the federal government, specifically the investment booster that offers higher depreciation rates for companies starting in 2025 and ending in 2027. The states and municipalities are anticipating a whopping 30 billion euros in losses.
Post-discussion, Merz mentioned that the federal government is well aware of the unique struggles faced by the states and municipalities. "We realize this is going to result in losses for the federal government, states, and municipalities," he stated. "So, we need to put in a massive effort and collaboration among the federal government, states, and municipalities on this matter. We'll keep discussing this over the next few days."
Friedrich Merz, Economy, States, Municipalities, Tax Relief, CDU
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The proposed federal tax cuts, designed to stimulate economic growth and investment, are the primary cause of concern for the states and municipalities. While these cuts reduce federal tax revenue, the government anticipates a steady increase in tax relief costs, reaching up to €17 billion by 2029[1]. This increase is expected to be partially time-limited. The stimulated economic growth is projected to enhance state and municipal tax revenues by expanding taxable income and economic activity in the long run [1][3].
The recovery of Germany's economy, which is expected to start from 2026 onwards due to expansionary fiscal policy and reduced trade uncertainties, will likely support the revenue base for states and municipalities [3]. The coalition government's tax reform, detailed in the draft bill published in June 2025, includes incentives for corporate investments, expanded tax credits, and measures to stimulate electric vehicle use and research and development [1]. However, there is no direct reference to specific compensatory payments or grants from the federal government to offset the tax revenue losses caused by federal tax cuts. Instead, the focus seems to be on stimulating economic growth, which is expected to indirectly compensate for potential revenue reductions in the long run.
- The states and municipalities are projecting a significant financial loss of 30 billion euros due to the tax cuts proposed in the federal government's investment booster, which offers higher depreciation rates for companies from 2025 to 2027.
- Friedrich Merz, in a meeting with state leaders, acknowledged the struggles the states and municipalities would face due to the tax cuts and emphasized the need for collaboration among the federal government, states, and municipalities to address these issues in the coming days.
