Federal and state governments negotiate over financial distribution and relief for municipalities

Lies sharpened the states' position into the formula: "Der Bund muss alles zahlen, was er auf den Weg bringt." With this, he made clear that the minister-presidents are aiming for automatic and full cost absorption by the federal government as soon as it enacts new tasks or services.

Disputed point: federal cost responsibility for federally mandated tasks

The German Association of Towns and Municipalities (Deutscher Städte- und Gemeindebund) is meanwhile warning of a precarious situation for municipalities. André Berghegger told the German Press Agency (dpa) ahead of the consultations: "Die finanzielle Situation der Städte und Gemeinden in Deutschland ist prekär. Dies ist maßgeblich auf die stetig steigenden Kosten für die Erbringung von Aufgaben, die durch Bundes- oder Landesgesetze veranlasst wurden, zurückzuführen." Berghegger demanded that the principle "Whoever orders, pays" must apply without restriction.

Berghegger put the municipalities' financing shortfall at 30 billion euros. "Eine rasche Entlastung der Kommunen ist mit Blick auf das Finanzierungsdefizit in Höhe von 30 Milliarden Euro unabdingbar," he said. Any future arrangement must therefore cover not only new tasks and benefits laws, but also actual cost increases from existing laws, for example in the area of children and youth welfare.

Federal Chancellor Merz had announced on Sunday that he wanted to relieve municipalities by cutting costs in certain social laws. Specifically, he named three of four major social laws: the Advance Maintenance Act (Unterhaltsvorschussgesetz), the Youth Welfare Act (Jugendhilfegesetz) and the Integration Assistance Act (Eingliederungshilfe). With this, he signaled a willingness to make adjustments to existing benefits, without however committing to a full cost compensation.

Berghegger warns of multi-billion deficit

There is also dispute over tax laws: the states are demanding a compensation mechanism when the federal government passes tax relief measures that simultaneously reduce the states' tax revenues. The federal government rejects such a mechanism in connection with tax laws. This position is likely to be among the toughest negotiating lines between the parties on Thursday.

The basic principle "Whoever orders, pays" is anchored in the current coalition agreement. But the states are insisting on a binding arrangement that goes beyond declarations of intent. They are demanding a mechanism that kicks in as soon as federal laws trigger new financial burdens – whether through new tasks, through benefit expansions, or through cost increases in already existing laws.

Berghegger reaffirmed the municipal umbrella association's demand: "Wir erwarten daher von Bund und Ländern, eine Regelung zu vereinbaren, durch die den Kommunen entstehende Kosten zukünftig vollumfänglich ausgeglichen werden." With this, the association makes clear that any solution other than full cost compensation would meet with rejection.

Open questions on tax laws

The recurring field of conflict between the federal government and the states over tax relief has repeatedly led to political tensions in the past. When the federal government cuts taxes, it simultaneously reduces the revenues of the states and municipalities, which are co-financed through tax receipts. The states see this as a one-sided shifting of burdens and are demanding compensation.

With Thursday's consultations, there is an expectation that the federal government and the states will at least discuss the outlines of a new financing mechanism. Whether an agreement can be reached is considered open in view of the opposing positions – particularly on the issue of tax laws. The municipalities, in any case, are stepping up the pressure ahead of the meeting and pointing to the urgency given the multi-billion deficit.

The next regular Minister-Presidents' Conference (MPK) will take place in any case, but even the upcoming meeting with the Chancellor is considered a key yardstick for whether the federal government and the states can move toward each other on the financial question or whether the negotiations will spill over into a longer phase of conflict.