Financial policy | Threatening backdrop for state financial equalization

It's not just behind closed doors that Markus Söder and his finance minister are raising the mood against state financial equalization. Photo: dpa/Malin Wunderlich It is a novelty in federal politics that the state financial equalization is used as a political means of pressure against the formation of an undesirable government in a federal state. Numerous Union politicians are currently threatening to financially sanction an alliance of the Left, the Greens and the SPD.

This is happening against the backdrop of a difficult financial situation in many federal states. Take North Rhine-Westphalia, for example: Only seven of the 396 cities and municipalities can still cover their current expenses with correspondingly high income this year. The deficit in the most populous federal state is therefore the “new normal”. This is the central result of the household survey carried out by the Association of Cities and the Association of Cities and Municipalities in North Rhine-Westphalia. The main reasons are increased social spending and tasks that come from the federal government, often without cost compensation. Against this background, the municipalities are dependent on transfers from the state, but the cash situation in the state capital Düsseldorf is also tense. 

It would even be catastrophic if there were no state financial equalization. It is therefore hardly surprising that politicians repeatedly argue loudly about this redistribution mechanism. State governments of donor countries have sued the Federal Constitutional Court against the existing financial equalization several times, most recently that of Bavaria. “It cannot be the case that a federal state alone is responsible for half of the financial equalization for many years,” says CSU Finance Minister Albert Füracker, who expects a decision from the judges in Karlsruhe this year. The compensation system was completely out of control.

However, the traditional state financial equalization, which was created by law in 1952 and regulated the direct redistribution of funds between the federal states, no longer exists. It was replaced in 2020 by a federal financial equalization, which consists of surcharges and deductions on sales tax, with the federal government getting involved. Both forms are based on Articles 106 and 107 of the Basic Law. These demand that the different financial strengths of the states and their communities be “appropriately balanced” in order to create “equivalent living conditions”. The essence of the matter is that the share of tax revenue ultimately corresponds to the number of citizens in a federal state. 

Germany's reality looks different. Measured against the average, NRW is in the middle field with 93.4 percent. Tax revenue per resident is lowest in Thuringia (53.9 percent). On the other hand, it is highest in Hamburg at 152.2 percent, followed by Bavaria (134.9), Hesse (119.7), Baden-Württemberg (107.8) - and Berlin with 104.6 percent.

According to a complicated model, the tax revenue is then redistributed by the ministry of Lars Klingbeil (SPD): between the federal and state governments and between the states. Due to their supra-regional importance, city states like Berlin receive a bonus in education (universities), while low-performing states receive a so-called federal supplementary allocation. For the comparatively high costs of political leadership in smaller states such as Saxony-Anhalt or structural unemployment in Saarland, the federal government transfers a “special needs federal supplementary allocation”. 

There are repeated attempts by CSU politicians to either abolish or further reduce state financial equalization.

Overall, the sales tax revenue that is relevant for financial equalization amounted to around 310 billion euros in 2025. The federal and state governments each received almost half of this, and the municipalities received a modest remainder. According to the Federal Ministry of Finance, a total of around 20 billion euros were redistributed. The states were granted surcharges or deductions at this level. Only four federal states fall into the latter group; Bavaria's deduction is the highest at 11.7 billion euros.

It is therefore not surprising that there are repeated attempts by CSU politicians to either abolish or further reduce the state financial equalization system. They are also the driving force in the latest threats against a possible left-wing government in Berlin, especially Bavaria's Prime Minister Markus Söder.

The bottom line is that the sums that are redistributed are manageable. The significance for the individual federal states is therefore limited. Despite above-average per capita tax revenue, Berlin received the highest award at 4.2 billion euros. Which is about a tenth of the Senate's spending. A peak value that, by the way, is only exceeded by Saxony-Anhalt, where there is a threat of an AfD government in the future, but which, significantly, is not bothered by requests for deletion from Union politicians from other countries. 

By the way, the Union is also threatening the capital with trouble elsewhere: with the “capital city financing” transferred from the federal government. This is an average of half a billion euros extra per year, which is intended to compensate for “capital-related additional spending” on security and culture. The contract between the state and federal government was only extended a few days before the election on September 20th and now runs until 2038.

By the way, Bavaria cannot unilaterally withdraw from the federal financial equalization: despite the threat against Berlin, the current system will not end until 2036 at the earliest. Until then, Söder & Co. can only rely on ongoing clarification by the Federal Constitutional Court or on new negotiations with other prime ministers. However, the recipient countries, which are in the majority, have no interest in changing the current mechanism. In any case, financial equalization is a constitutional requirement; Lawyers are unanimously of the opinion that the Basic Law does not allow for a single country to be disadvantaged for political reasons.

There is also no eternal guarantee for federal financial equalization. This is particularly shown by the example of Bavaria, which has been complaining for years about payments that are supposedly too high: the Free State owes its transformation from an agricultural to an industrial state partly to the state financial equalization. By 1986, based on today's purchasing power, he received around ten billion euros from this.

This article cost you nothing. Us: research, production and technology. We saved on office rent as well as printing and distribution. And we gave up salary. Nevertheless, the calculation doesn't work without you. We need 300,000 euros by the end of the year. You pay what you can, in return we keep writing.

No paywall, no small print, just one goal: that nd stays.