German Finance Minister Hans Eichel: "We need to improve the financial situation of municipal government."

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This is an archived article published in August 2003
Berlin government proposes to provide
more tax revenues for German cities

The German government proposes to boost municipal tax revenues as part of its 'Agenda 2010' reform programme. The reforms, once implemented, should add 4.5 billion euro to municipal coffers in 2004, and then five billion euro in the following year.

This additional money for local government is to be obtained from savings achieved by merging the unemployment benefit and social welfare systems as well as from an increase in trade tax revenues. A new form of tax is to be imposed on self-employed professionals, such as doctors, lawyers, and tax consultants. For the first time, they would be required to pay trade tax to their local governments but they will be able to deduct this tax from their income tax. Furthermore, the German finance ministry proposes to close several tax loopholes now benefiting large companies.

The financial situation of many towns and cities in Germany is in dire straits. Local governments receive only 15 per cent of national income tax revenues as opposed to 100 per cent of local trade tax revenues. An annual increase of 2.5 billion euros in revenues from trade tax would strengthen the ability of municipal governments to spend money on improved local services. The planned fiscal reforms will provide additional disposable income of five billion euro annually for local authorities.

German Finance Mininister Hans Eichel told CityMayors that the objective of the reforms was to improve the financial situation of local governments and to stabilise local tax revenues. The Minister stressed that there would be no tax increase for self-employed professionals. “The proposed reforms will not worsen the fiscal situation of self-employed taxpayers, since it will be possible to deduct local business tax paid from annual income tax," he said.

The German government also intends to transfer 1.4 per cent of VAT revenues to local governments to help ensure greater stability in the availability of tax revenues. Some 2.5 billion euro in additional revenues from the new local business tax is to be supplemented by 1.5 billion euro from federal government to local authorities for the creation of day-care facilities and as of 2005 by an annual one billion euros through savings achieved as a result of merging the unemployment and social welfare insurance systems.

Petra Roth, Mayor of Frankfurt and President of the German Association of Cities

German Cities Association rejects government reform proposals
The German Association of Cities (Deutscher Städtetag)) will oppose government plans for tax reforms meant to relieve Germany's cash-strapped cities. The Association said that the reforms would force towns to take cost-cutting measures and reduce services. The plans foresee introducing business tax for freelancers and the self-employed, rolling the social and welfare benefits cities pay their jobless into one payment and closing tax loopholes. The changes are aimed at reducing cities' financial burdens by more than 4.5 billion euro in 2004.

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