This research projekt investigates the developement and adjustment need of the fiscal equalisation system between municipalities in North Rhine-Westphalia. It will provide the legislator with a dicision basis for restructuring the fiscal equalisation system. Specifics of the municipal structure in North Rhine-Westphalia will be adequately considered in the analysis.
Documents, Literature, Expert know-how
The Ministry of the Interior of the state North Rhine-Westphalia commissioned the Ifo Institute with the revision of the system of municipal financial equalisation. The focus was on the system of allocation of funds according to a certain key (Schlüsselzuweisungssystem). In addition, vertical aspects of the system of municipal financial equalisation and the system of the allocation of investment allowances were to be analysed.
The reviewers do not suggest any changes regarding the institutionally established process of deliberating the vertical financial distribution between the state and the municipal level. The examination of alternative approaches to determine the amount of fiscal equalization did not lead to a positive result. The equality principle which some states use does not improve the current situation. The foundation of a stabilisation fund in this context is not considered to be required either.
The report confirms the method for determining fictitious needs in the system of allocation of funds according to a certain key and further develops it in compliance with findings of the public economics literature. The experts recommend the retention of the initial measurement (Ausgangsmesszahl) which is used to capture the fictitious needs. Accordingly, the Main Approach is still to be used, as well as the Secondary Approaches – the Pupil Approach, the Social Load Approach and the Centrality Approach. For the Student Approach, a new and easier calculation method was derived which solely differentiates between half-day and all-day pupils. The Social Load Approach was modified to meet the changed institutional framework for households in need of social assistance, which has been in place since the introduction of “Hartz IV”. In addition to the Secondary Approaches, which are part of the Law for Community Financing in 2008, the reviewers suggest developing an Area Approach if the legislator favours admitting such a component of needs (Bedarfskomponente) into the system of allocation of funds according to a certain key. In any case, the capture of the fictitious revenue was confirmed. However, in contrast to the currently implemented method, the reviewers recommend adjusting the fictitious municipal rate for business tax to the national average of actual municipal rates for business tax.
Regarding the system of blanket earmarked allocation of funds, the reviewers recommend, for reasons of efficiency and communal autonomy, to turn them into general allocation of funds according to a certain key in the long run. In order to support the sustainability of the current attempt of consolidation and to reduce the risk of directing funds as much as possible, the first step should be to merge the current blanket investment and special allocation of funds into “general blanket investment allocation of funds”. This should include no regulations except that they are only to be used for investments. The allocation should still be carried out separately on the three levels of public bodies. Concerning the calculation of the new allocation key, the reviewers used a method which replicates the current key as well as possible.
Thiess Büttner, Fédéric Holm-Hadulla, Rüdiger Parsche and Christiane Starbatty (2008), Analyse und Weiterentwicklung des kommunalen Finanzausgleichs in Nordrhein-Westfalen, ifo Forschungsbericht No. 41, Munich: Ifo Institute for Economic Research.
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