Federalism and financial structures

As a structural and organizational principle, federalism generally describes an alliance of autonomous and equal entities within a superordinate whole. Germany's federalist system is characterized by a "functional division of responsibilities" as described in the country's Basic Law. According to these structures as defined, the federal government -- in which the states participate through their representation in the Bundesrat -- is almost exclusively responsible for drafting and passing legislation. The states, in contrast, are responsible for implementing and executing these laws, since the federal government's administrative purview is limited. This relationship, an aspect unique to the German system, requires ongoing, extensive consultation and coordination between the federal and state levels. As a result, both levels suffer from a limited ability to take action.

The division of responsibilities between the federal and state levels as pertaining to legislative and administrative tasks is also reflected in Germany's financial structures as set out by its Basic Law, in that the federal government is almost solely responsible for creating the country's tax laws. The states, conversely, are charged with collecting taxes and administrating revenues, with funds from the three main tax sources (income, corporate and sales taxes) divided among the federal, state and local levels. Both the overall system of taxation and the numerous mechanisms for reconciling and transferring revenues have been the subject of public debate for quite some time.

The Bertelsmann Stiftung wants to contribute to the current debate on restructuring federal-state relationships within the country's federalist system. Its efforts have focused on the following proposals:

Financial structures that follow from assigned responsibilities
The financial structures as set out in the Basic Law must be seen as directly following from the distribution of responsibilities within the federalist system. The country's federal and state governments can only act autonomously in any meaningful way when both levels are able to fund the responsibilities assigned to them. The key question behind any reform effort must therefore be: To what extent do existing financial structures account for both current and future political requirements?

Transparency and effective management
Over both the medium and long term, any reform of the country's funding structures must ensure an efficient allocation and management of limited financial resources at the state and federal levels while minimizing the costs involved in redistributing funds from one level to another. A key question is how to optimize the cross-level networking and coordination structures found in specific policy areas as well as the associated administrative systems. Any long-term solutions designed to ensure that both federal and state actors can take effective action (in terms of both funding and budgeting) must also reflect European and global requirements, along with existing revenue-transfer needs. In particular, such solutions must address the special needs of Germany's eastern states.

Fiscal efficiency
Any reform of Germany's financial structures geared toward ensuring fiscal efficiency must effectively balance in an empirically sound way the advantages of according individual states autonomy in decision-making matters, on the one hand, and higher-level policy requirements, especially those arising from Europe's ongoing integration efforts, on the other. Given recent efforts made throughout Europe to harmonize tax regulations, it only seems reasonable to provide Germany's states with increased autonomy in tax matters to the extent that this truly improves administrative and management efficiencies in the realm of public finance.

A win-win situation at the federal and state level
From a political perspective, any reform of Germany's financial structures geared toward medium- and long-term gains can only be implemented if it provides a win-win situation for all constituents. Especially given that those states with a weaker fiscal base must approve any planned reforms, an approach is needed that is structurally well designed and that ensures effective financial planning and forecasts over the long term. In this regard as well, such an approach must take into account that, as in the past, Germany's eastern states will only be able to generate one-third of the tax revenues of their western counterparts.