Financial Equalization : Germany

The financial situation of the individual states varies considerably because their natural resources and economic structures are also very different. Thus financially strong states such as Baden-Wiirttemberg, Bavaria, Hamburg, Hesse or North Rhine-Westphalia have substantial financial resources, whereas the financially weaker states in the east as well as Bremen and the Saarland do not.

These financial disparities are mitigated by a nationwide financial equalization regime. This multilevel financial equalization is achieved by allocating the states’ share of revenues from the turnover tax among the individual states according to a differentiated formula, by requiring financially strong states to make equalization payments to financially weak states, and, finally, by providing federal complementai grants to the latter.

A “vertical financial equalization” takes place between the states and the municipalities. The tax revenues and other revenues of the municipalities are inadequate for their tasks. They therefore depend on grants from the states. Some of these grants are tied to specific purposes, but others are freely disposable. The aim of this municipal financial equalization is to reduce the disparity in each state between municipalities with high and those with low tax revenues.