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Chapter 6. Fiscal Federalism inGermany

A. Federalism in Germany: theConstitutional and Political Context

The Federal Republic of Germany established in1949 has firm historical roots in the earlier experience of the German Empire(1871-1918), the Weimar Republic (1919-34), thefailure of the totalitarian centralization of the Third Reich (1934-45), andthe immediate postwar influence of the allied occupying powers. In 1949, theeleven Länder of WestGermany became the Federal Republic of Germany.Thirty-one years later, the reunification of Germanyin 1990 provided for the accession of five new Länder from what had previously beenthe Democratic Republic of Germany. The federation, therefore, now consists ofsixteen Länder with atotal population of over 80 million. The population ofthe German federation is linguistically homogeneous, although there remainsconsiderable economic disparity and difference in political cultures betweenthe former West and East Germanies.

A notable characteristic of the Germanfederation, by comparison with the Canadian and United States federations, isthe extensive constitutional and political interlocking of the federal andstate governments. The federal government has a very broad range of exclusive,concurrent (with federal law prevailing) and frameworklegislative jurisdiction. But the Länder in turn have a mandatory constitutional responsibility for applying and administering most ofthese federal laws. While the legislative powers of the federal government aremuch more extensive than in Canada or the UnitedStates, another significant feature of the German federation is that theLänder are moredirectly involved in decision-making at the federal level than the states orprovinces in virtually any other federation. This isachieved through the constitutional requirement that the second chamber, theBundesrat, is composed of Land first ministers and senior ministers serving asex officio delegates of their Land governments. The Bundesrat possesses anabsolute veto on all federal legislation affecting theLänder. In practiceabout 60 percent of federal legislation falls in this category and thereforethe voice of the Länderthrough the Bundesrat is highly influential in federal policy-making. Thus, theBundesrat is a key institution in the interlockingfederal-state relationship and the extensive joint decision-making that occurswithin the German federation including those on financialinterrelationships.

Both the Federal and Land institutions areorganized on the principle of parliamentary responsible cabinets, with theChancellor at the federal level and a Minister President in each Land as theheads of government accountable to their legislatures. In addition there is aformal head of state with largely ceremonial powers, the President of the Federal Republic, who is elected by anelectoral college consisting of the Bundestag and an equal number of memberselected by the legislatures of the Länder.

Fiscal federalism in the German federation isof particular interest because of the way they relateto the closely interlocked legislative and administrative powers of the twoorders of government, and because of the unique way in which the Länder participate in federaldecision-making through their representation in the Bundesrat. This makes the Bundesrat a key institution in the highlyintegrated legislature, administrative and financial interdependence of the twoorders of government.

1. Constitutional Statusof Various Orders of Government

The Federal Republic of Germany consists of afederal (Bund) government, 16 Land (state) governments, and numerous municipal(or local) governments. All of the federal and Land governments are organisedon the basis of the parliamentary system. There is a formal, indirectly electedhead of state, the President of the Federal Republic.

The Federal and LandLegislatures

The fusion of legislative and executivebranches of government within the federal and Land legislatures effectivelytransfers legislative power to the executive branch of government. However,unlike in the majoritarian Westminster model of parliamentarism, Germangovernments are at both levels frequently composed of a coalition of two ormore political parties. Therefore, government positions represent a compromisearrived at through a process of inter-party bargaining within the governingcoalition.

One of the most distinctive features of theGerman system of government is the Bundesrat, the Upper House of the federallegislature. The membership consists of exofficio delegates of the Landgovernments each Land delegation voting as a block under direction from itsgovernment. Thus, the governments of the Länder are directly involved in thefederal decision-making process. The Bundesrat holdsan absolute veto on all legislation affecting theLänder; in practiceabout sixty percent of all federal legislation falls into this category becausethe Länder areresponsible for administering all federal legislation in areas of concurrentjurisdiction. The Bundesrat has a suspensive veto on all other federal legislation. The institutional position of theBundesrat produces what is commonly referred to as an ‘interlocking’ relationship between the Federaland Land orders of government.

The Bundestag, the Lower House of the federalparliament, is elected via a mixed electoral system. The voter casts twoballots, one for a constituency member, and one for a political party.Constituency members are elected on a first past the post basis, while theparty list members are elected on a proportional basis. The result is that theparty membership of the Bundestag very closely matches the party votedistribution. A party must, however, receive at least five percent of the voteor win at least three constituency seats in order to be represented in theBundestag; this rule discourages a splintering of the vote.

Following an election where, as is often thecase, no party emerges with a majority, there is a period of inter-partybargaining as parties negotiate the terms of agreements to form a governingcoalition. The leader of the party with the most seatsbecomes the Chancellor, or in the Länder Minister President; cabinet posts are allocated among theparties to the coalition as negotiated in the coalition agreements. While there is frequently ongoing inter-partytension within the governing coalition, parties have honoured their coalitionagreements and thus stable governments have been the norm.

Land legislatures are unicameral, with theexception of bicameral Bavaria. The relationship between the executive and thelegislature (Landtag) is the same as it is in the federal Bundestag. In thethree historic free cities (Berlin, Bremen, and Hamburg) the Landtag is alsothe city council, and the mayor is head of the government.1


The Federal Constitutional Court isestablished under the constitution, and has comprehensive jurisdiction over allquestions of federal constitutional law. It is not, however, a court of generalappeals as are the Supreme Courts of Canada and the United States, but ratheronly determines constitutional questions. It is assigned the followingfunctions: the judicial review of legislation, the adjudication of disputesbetween Land and Bund political institutions, the protection of individualcivil rights as constitutionally guaranteed, and the protection of theconstitutional and democratic order against groups and individuals seeking tousurp it.2 Half the members of the Constitutional Court are appointed by theBundesrat on behalf of the Länder and half by the Bundestag. In both cases two-thirds majorities are required.

With the exception of seven national courtsof appeal, all regular tribunals are Land courts, established and administeredby Land statutes.3 However, they apply a unifiednational legal code.

Constitutional Status ofthe Federal and

The Basic Law explicitly states that allstate authority emanates from the people, and that the organs of government aresimply the means via which the people exercise their authority.(Article 20(2)As well, the federal nature of the German state isguaranteed by the Basic Law: the so-called ‘eternity clause’ of the Basic Law prohibitsamendments which would abolish the Länder.(Article 79(3)

Two fundamental features of the distributionof powers are worthy of note. First, the Basic Lawallocates legislative jurisdiction on the basis of an exclusive list of federalpowers and a list of concurrent powers, with the residual power remaining withthe Länder.4 Exclusivefederal legislative power is granted in areas which include foreign affairs anddefence, citizenship and immigration, rail and air transport, criminalpolicing, and foreign trade.(Article 73) An extensive list of areas ofconcurrent legislative jurisdiction includes such areas as civil and criminallaw, the regulation of nuclear energy, labour relations, environmentalprotection, and road transport.(Article 74)

There are also two additional specialcategories of concurrent powers in the Basic Law. First, the federal governmentmay under its ‘framework’powers restrict the exercise of Länder legislative authority, to alimited extent, in certain fields.(Article 75) In these fields, the federalgovernment has the right to enact framework legislation aimed at providing adegree of uniformity of action across the federation; within these parameters,the Länder have theright to enact customized, detailed laws. Frameworklegislative fields include areas such as higher education, nature conservation,and regional planning. Second, there is a constitutional provision for thefederal and Land governments to carry out ‘joint tasks’ together. These areas includeuniversity construction, regional policy, agricultural structural policy andcoastal preservation, education planning, and research policy.

A second notable feature of the Germandivision of powers relates to the distribution of administrative authority. Inthe Anglo-American federations, the general principle is constitutionallymandated legislative-administrative coincidence.5 That is, the order ofgovernment that has legislative jurisdiction over a policy area also hasadministrative responsibility for that area. In the German federation, bycontrast, the Land governments are largely responsible for the administrationof legislation, whether that legislation originates at the federal or Landlevel. Thus it is possible to have a relatively high degree of legislativecentralization, while retaining a high degree of administrativedecentralization. Constitutional protection of theadministrative role of the Länder serves as a bulwark againstthorough-going centralization of the federation.


Local government autonomy is constitutionallyguaranteed.6 The local government bodies which carry out many of theadministrative tasks attributed to the Länder thus have their status protected, even to the degree of raising legalquestions concerning that status before the Federal Constitutional Court.However, the organization and supervision of local governments falls within thelegislative sphere of the Länder.

2. ConstitutionalAllocation of Revenue and Expenditure Responsibilities and Provisions Relatedto Intergovernmental Transfers

The German constitution is quite specific inregard to issues of fiscal federalism. Separate articles of the Basic Lawassign competency for legislation, for administration, for revenue-raising, andfor expenditure among orders of government.7 In general, legislative powerlies at the federal level, administrative responsibility primarily at the Landlevel, and revenue-raising and expenditure powers are shared. As regards thefederal legislative power, however, the role of the Bundesrat in federaldecision-making must be borne in mind.

Constitutional Allocationof Revenue

As assignment of tax revenue is determined bythe constitution, only minor adjustments in these assignments can be made bylegislation, while major adjustments require constitutionalamendments.

While the Basic Law distinguishes between theright of each layer of government to legislate on specific taxes, and the rightto appropriate the proceeds of taxes, in practice the two are tied together.The exclusive federal power to legislate on taxes is restricted to customsduties and fiscal monopolies.(Article 105 (1) )The power to legislate on alltaxes the revenue from which is shared is concurrent;in practice, this means that the Länder can use the federal Bundesrat as their vehicle for shapingfederal tax legislation.8

The major feature of German revenue-raisingarrangements is constitutionally-mandated sharing of tax revenues. All of themost important revenue sources are shared. Together, the wage and assessedincome taxes, the corporation income tax, and the general sales, or value addedtax (VAT), make up about three-quarters of total tax revenue, and the proceedsof all are shared. 9

Personal Income Taxes

The constitution mandates that the proceedsof the personal income tax are shared among the Bund, Land, and local orders ofgovernment.(Article 106(3)) The federal and Land orders of government eachreceive 42.5 percent of the proceeds, with the remaining 15 percent accruing tolocal governments.

Corporate Income Taxes

Corporate income tax is constitutionallymandated to be shared equally between the Federal and Land governments.(Article106(3))

Sales Taxes

The proceeds of the VAT are constitutionallymandated to be shared between the Bund and Land orders of government, but therespective shares are determined by federal legislation. The ratio is reviewedevery two years, and adjusted if necessary in light of changing financial needs; this provides an important element of flexibility infiscal arrangements. At present, the allocation ratio is 56:44, for theFederation and Länderrespectively.

Constitutional Allocationof Expenditure Responsibilities

The relatively centralized system ofrevenue-raising is counterbalanced by a relatively decentralised system ofexpenditure. Land administration of both Federal and Land legislation meansthat the vertical division of legislative competences is not reflected in thedistribution of administration and hence of expenditures among orders ofgovernment.10 Thus, expenditures for areas as varied as social policy andinvestment in infrastructure are made by all orders of government.

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