Fiscal equalization in the broader sense is the sum of all regulations concerning the distribution of tasks, expenditures and revenues between the territorial authorities. The Bavarian Law on Fiscal Equalization between the State, Municipalities and Associations of Municipalities (Bavarian Fiscal Equalization Law - BayFAG) regulates which tax revenues of the State the municipalities participate in and to what extent and how the funds provided by the Free State are distributed. Municipal financial equalization in the narrower sense deals with financial relationships between the regional authorities.
Within the framework of municipal financial equalization
- the state improves the financial resources of the three levels of local government (municipalities, counties and districts) so that they have sufficient funds to fulfill their tasks;
- the state regulates the financing of the counties and districts through the county and district levy;
- different revenue possibilities of the individual municipalities are balanced to a high degree according to their needs;
- municipal investment measures are supported in a targeted manner, and
- the municipalities are relieved of the burden of financing current tasks by means of state benefits.
Goals of municipal fiscal equalization
Municipal fiscal equalization has two main objectives, one fiscal and one distributional:
- First, government allocations supplement the municipalities' own revenues. The municipalities are supported so that they can fulfill their tasks appropriately.
- On the other hand, fiscal equalization is intended to ensure a financial distribution among the municipal levels and the individual municipalities that is appropriate to the tasks.
Municipal fiscal equalization thus contributes to the creation of equal living conditions throughout the country. However, the principle of equal treatment and the constitutional guarantee of local self-government draw a line here: the different financial strength of the municipalities must not be completely leveled or even over-leveled.
Both objectives correspond to the role of the state as guarantor of local self-government. Self-responsible action by self-governing bodies presupposes their financial capacity. The state is therefore constitutionally obliged to ensure the financial viability of its municipalities within the framework of its own capacity.
Characteristics of the current equalization system
The system of municipal financial equalization is characterized by several structural features, two of which are particularly distinctive.
The first characteristic is the so-called tax associations. Through them, the municipalities have a percentage share in certain tax revenues of the state. In this area, the state and the municipalities form a kind of "community of fate."
The second defining feature is the apportionments between the individual municipal levels and between the state and the municipalities. As a result, the financial flows are not only "top-down" but also "bottom-up."
Sources of municipal fiscal equalization (Where do the funds come from?)
Funds fromthe Free State of Bavaria
The state's fiscal equalization payments are financed by the tax associations and from other general budget funds.
In Bavaria, the municipalities participate in four different tax associations:
- General tax association (Art. 1 of the Bavarian Fiscal Equalization Act - BayFAG)
Within the framework of the general tax association, the Free State of Bavaria grants the municipalities and counties a share of 12.75 percent of its revenues from income tax, corporate income tax, sales tax (excluding those shares that are handed out to the municipalities under special regulations or that are left to the state by the federal government to fulfill special purposes) and the trade tax levy. The municipal share of the general tax revenues is used primarily to finance the key allocations (for more details, see below).
- Motor vehicle tax substitute association (Art. 13 to 14 BayFAG)
The Free State originally left part of its revenue from motor vehicle tax to the municipalities via the motor vehicle tax association. The revenue sovereignty for the motor vehicle tax was transferred to the federal government on July 1, 2009. To compensate for this, the states receive a non-dynamized fixed amount from the federal government (motor vehicle tax substitute association). The Free State gives the municipalities a share of 70 percent of this (municipal share).
The funds are primarily earmarked for promoting the construction, expansion and maintenance of municipal roads and the construction or expansion of infrastructure facilities for local public transport (ÖPNV).
- Income tax rate (Art. 1b BayFAG)
The change in the way child benefit is calculated as a result of the reorganization of the family benefit equalization system from 1996 onwards, as well as changes in tax law as a result of the 2011 Tax Simplification Act, have led to a reduction in income tax revenue for the Länder and municipalities. To compensate for this, the federal government gives the states a higher share of the revenue from sales tax. The Free State passes on the full amount of the compensation attributable to the municipalities in proportion to their share of income tax (26.08 percent).
- Real Estate Transfer Tax Association (Art. 8 BayFAG)
The municipalities and counties have a share of 8/21 (municipal share) in the revenue from real estate transfer tax. The municipal share is distributed among the municipalities according to the respective local revenue. Independent municipalities and large district cities receive the full municipal share, the other municipalities belonging to the district receive three sevenths of the municipal share themselves and their districts receive four sevenths. The tax offices transfer the municipal share to the municipalities on a monthly basis. The funds are freely available as so-called general budget funds.
- General budget funds
In addition to the composite services, the municipalities receive additional budget funds from the state budget. They are used, for example, to finance financial allocations and the state share of hospital financing, as well as, in some cases, needs allocations or stabilization assistance, allocations for municipal building construction measures and allocations to the districts.
Local government funds
The primary source of revenue for counties, the county levy, is provided by the county municipalities in each county. The districts' main source of revenue, the district levy, is raised by the districts from the counties and independent municipalities in the territory of the respective district. Through the county and district levy, the counties and districts participate indirectly in the tax revenues of the municipalities.
The counties and independent municipalities participate in half of the hospital financing via the hospital levy.
The federal government provides subsidies for public transport investments eligible for funding under the Municipal Transport Financing Act (GVFG) (for more details, see below). In 2023, the Free State is expected to receive 55 million euros.
In addition, the Free State of Bavaria can draw on a total of around 295 million euros from the Hospital Structural Fund set up by the federal government from the liquidity reserve of the Health Fund in accordance with Section 12a of the Hospital Financing Act (KHG) in the years 2019 to 2024 to co-finance certain structural improvement projects in hospital care.
Benefits of municipal financial equalization (Where do the funds go?)
The main areas of municipal financial equalization are:
- Key allocations (Art. 2 to 6 BayFAG)
The key allocations supplement the tax revenues of the municipalities and the levy revenues of the counties in line with their tasks. Certain special burdens, such as social burdens, are taken into account. The funds for the key allocations are taken from the municipal share of the general tax pool. Of the key mass, 64% goes to the municipalities and 36% to the districts.
When determining the key allocations, the task burden of a municipality is compared with its revenue potential on the basis of objective indicators. A fictitious burden is determined on the basis of several criteria (number of inhabitants, district autonomy, structural weaknesses, social burdens, childcare) and compared with the municipality's tax power, which is in part determined in a standardized way, e.g. for trade tax and property tax by means of "levelling assessment rates". The higher the difference between the tax burden and the tax power, the higher the respective key allocation to the municipality.
In this way, a revenue situation of the individual municipality that is too weak in relation to the respective tax burden is partially compensated by higher key allocations.
If the tax power of a municipality exceeds its tax burden, then it does not receive any key allocations. Such an efficient municipality is called "abundant".
The key allocations are granted "automatically", i.e. without application.
- Financial allocations (Art. 7, 9 BayFAG)
Municipalities, administrative communities and counties receive lump-sum financial allocations as compensation for the administrative expenses for the tasks of the transferred sphere of action, counties also as compensation for the administrative expenses for the state authority Landratsamt. The allocations are granted "automatically", i.e. without application.
- Municipal building construction (Art. 10 BayFAG)
The allocations for municipal building construction measures are primarily intended to ensure that a roughly equivalent infrastructure can be provided to the necessary extent in all regions of Bavaria, particularly in the areas of public schools and daycare facilities for children. In principle, new buildings, conversions and extensions as well as general and partial refurbishments of public schools (including school sports facilities), student dormitories and daycare facilities for children are eligible for allocation. In addition, structural investments for professional municipal theaters and concert halls are eligible for allocation under certain conditions.
- Allocations for the costs of transporting pupils (Art. 10a BayFAG)
The state grants flat-rate allocations to the responsible authorities to cover the costs of the necessary transport of pupils at certain types of schools (e.g. public primary, secondary and special schools, public or state-recognized secondary modern schools, grammar schools, full-time vocational schools). On average in the state, these cover at least 60% of the costs of pupil transportation incurred by the responsible bodies.
The individual annual allocation is calculated on the basis of the number of pupils entitled to transportation as of October 1 of the previous year (October 20 in the case of vocational schools) and the costs of the necessary pupil transportation recorded in the municipal accounting statistics for the previous year. The number of pupils entitled to transportation must be reported annually by the municipalities to the Bavarian State Office for Statistics. Otherwise, no application is required. The allocations are granted "automatically", i.e. without the need to submit an application.
- Needs-based allocations and stabilization aid (Art. 11 BayFAG)
Classic needs-based allocations under Art. 11 BayFAG take account of the exceptional situation and the special burdens on expenditure and costs of municipalities or districts in individual cases. They are subject to a strict principle of subsidiarity and may not be granted for the direct or indirect financing of investments and their follow-up costs.
As a rule, municipalities and administrative districts only receive classical needs allocations if they are no longer in a position to balance their administrative budget and/or to generate the minimum transfer to the asset budget due to events for which they are not responsible and despite exhausting all their own revenue possibilities. In the case of double-entry budgeting, a negative balance from current administrative activities is required.
Since 2012, structurally weak municipalities or municipalities that are particularly affected by demographic developments and are in financial difficulties or whose financial performance is at risk can be supported in their budget consolidation by means of so-called stabilization assistance, a special form of needs-based allocations (= "state assistance for self-help"). Since 2019, stabilization assistance to municipalities has been designed as a two-pillar model - stabilization assistance for the repayment of old debt (pillar 1) and/or investment assistance (pillar 2).
The aim is to reduce debt and reduce interest and repayment payments by consolidating and supporting the municipalities with stabilization assistance, thus creating more financial room for maneuver. The investment shares or investment aid serve to prevent an increasing investment backlog or to reduce it in the case of basic municipal equipment.
Decisions on all applications for needs-based allocations or stabilization aid are made by the State Ministries of Finance and of the Interior, Sports and Integration after consultation with the central municipal associations at the annual distribution committee meeting.
- Investment lump sums (Art. 12 BayFAG)
Municipalities and districts receive investment lump sums to finance investment, repair and modernization measures. The respective municipality decides for which investments the funds are to be used.
The lump sums are granted "automatically", i.e. without the need to submit an application.
- Municipal road construction and maintenance (Art. 13a, b, c, f and h BayFAG)
Funds from the motor vehicle tax substitute are available to promote the construction, expansion and maintenance of roads in municipal charge. The following are eligible for funding under certain conditions
- the construction, expansion and maintenance of district and municipal roads as well as local through-roads of federal, state and district roads in the charge of municipalities,
- the construction and expansion of certain sidewalks and bicycle paths as well as cycle paths,
- the extension of public field and forest paths, insofar as the mixed use of pedestrian and bicycle traffic with agricultural and forestry traffic makes the construction of a pedestrian and bicycle path necessary for traffic unnecessary,
- the construction of bypasses or relief roads in the course of state roads, which are under the special construction obligation of the municipality, as well as
- the modification of intersections between state and municipal or county roads.
Support for municipal road construction and maintenance is provided in the form of targeted allocations for construction measures, lump-sum fixed amounts for road construction and maintenance, and lump-sum road expansion payments.
- Local public transport (Art. 13c (2) and Art. 13d BayFAG)
In addition to state funds under the BayGVFG and BayFAG, federal funds under the GVFG and the Act on the Regionalization of Local Rail Transport are also available to promote investments in local public transport (e.g. construction or expansion of streetcar, subway and commuter rail routes as well as central bus stations and stops).
BayFAG funds are granted as complementary funding for the construction or expansion of transport facilities for general public transport or commuter trains that are funded by the GVFG or the Bavarian Municipal Transport Financing Act (BayGVFG). Only the BayGVFG provides funding for the procurement of buses and metro and streetcar vehicles. Funding from the GVFG federal program is only possible, among other things, if the eligible costs exceed 30 million euros (for measures included in the GVFG federal program by the end of 2020: 50 million euros).
To co-finance the holding costs from local transport services, to promote public services in local public transport and to cover cost coverage shortfalls in transport cooperations, the public authorities responsible for general local public transport receive allocations in accordance with Art. 27 BayÖPNVG. These are granted from the funds of Art. 13d BayFAG, which are designed as a fixed amount. Approximately 66 percent of the funds are allocated to the region and 34 percent to the metropolitan areas of Munich, Regensburg, Würzburg, Augsburg and the Nuremberg/Fürth/Erlangen urban axis.
- Allocation to the districts (Art. 15 BayFAG)
The state grants the districts an allocation to cover the burdens they incur, especially as providers of integration assistance and as supra-local providers of social assistance. The allocation is granted "automatically", i.e. without the need to submit an application.
- Hospital financing (Art. 10b BayFAG)
Under the dual hospital financing system, the costs of the necessary acute inpatient investments of hospitals included in the hospital plan of the Free State of Bavaria are not covered by the revenues from the nursing rates or per-case flat rates, but are assumed by way of public funding. Half of the funding is provided by the state and half by the municipalities. The municipal share is provided by a hospital levy to be paid by all districts and independent municipalities. In addition to the state funds, federal funds from the Hospital Structural Fund pursuant to Section 12a of the German Hospital Act (KHG) will be available in the years 2019 to 2024, which can be used to co-finance certain projects to improve the structure of hospital care.
Further information can be found under "Related topics".