A stalemate is emerging between the German federal government and state governments regarding the implementation of a financial compensation mechanism for legislation, potentially escalating tensions and hindering legislative progress. According to a recently released report from a joint federal-state working group, a fundamental disagreement persists on how to ensure the principle of “who orders pays” also known as “causal linkage” is applied – a concept stipulating that the federal government should offset costs imposed on states and municipalities resulting from new laws.
The impasse centers on differing approaches to operationalizing this principle. The state governments have proposed a concrete threshold: the federal government should commit to providing compensation for legislation generating costs exceeding €250 million for states or €100 million annually for municipalities within the first three years of its implementation. They advocate for this compensation to be delivered through an increased share of value-added tax (VAT) and structured with dynamic adjustments to reflect evolving financial realities. Notably, the states are also demanding compensation for federal tax law changes, essentially seeking reimbursement for reductions in state tax revenue.
The federal government has rejected this detailed model, deeming it overly prescriptive and inflexible. Instead, it proposes a periodic review of the financial situation across all levels of government – federal, state and municipal – with subsequent adjustments to the VAT distribution formula. This approach, according to the working group’s document, seeks to encompass “all necessary expenses and ongoing revenues” in a holistic assessment, ensuring a “globally fair load distribution” rather than targeting compensation based on individual law’s financial impact.
Critics argue the federal government’s proposal lacks clarity and introduces a level of bureaucratic uncertainty that undermines the core principle of fiscal responsibility. The lack of a clearly defined trigger for financial support risks creating a system prone to political maneuvering and potentially leaving states and municipalities vulnerable to unforeseen legislative costs. Furthermore, the vague language surrounding “globally fair load distribution” opens the door to subjective interpretation and could exacerbate existing power dynamics between the federal government and its constituent states. The ongoing disagreement signals a widening rift in fiscal policy coordination and underscores the challenges of ensuring accountability in German legislation.