Federal states demand compensation for millions: tax reform endangers municipalities!

Federal states demand compensation for millions: tax reform endangers municipalities!

On June 5, 2025, the federal states face a financial challenge as they demand compensation for the tax losses that will arise from the federal government's planned corporate tax cuts. These tax cuts are part of the so-called investment booster launched by the new government to stimulate the economy and increase international competitiveness. Saxon Prime Minister Michael Kretschmer (CDU) emphasizes that states and municipalities cannot simply shoulder the financial losses. Lower Saxony's head of government, Olaf Lies (SPD), also spoke out and called for an adjusted "alleviation of the consequences" of the tax cuts in order not to place additional burdens on the affected regions.

A central element of the package of measures includes a special fund of 500 billion euros intended for infrastructure investments. Kretschmer estimates that the revenue losses due to the tax cuts will be between 46 and 48 billion euros, with around 60% of these losses falling on the states and municipalities. At the Prime Minister's Conference, the heads of government have already discussed the necessary steps to successfully implement the plans between the federal and state governments. The vote in the Federal Council on the tax cuts is scheduled for July 11th, with agreements regarding financial compensation to be reached before this date.

Financial perspectives and risks

Saarland Prime Minister Antje Rehlinger (SPD) expressed concern, warning that the tax cuts could result in falling investments. The Hessian Prime Minister Boris Rhein (CDU) is also optimistic about the solution to the financing issues, while the Vice Chancellor and Federal Finance Minister Lars Klingbeil (SPD) is in contact with the heads of government of the federal states to discuss the necessary support.

The bill presented by Klingbeil aims to help the economy out of the recession through investment incentives and tax relief. The planned measures include expanded depreciation options for electric vehicles and machinery as well as a gradual reduction in corporate tax from 15% to 10% by 2032, which is intended to improve Germany's long-term competitiveness.

Concrete impact on companies

The introduction of a special closing for movable assets of up to 30% for the period 2025 to 2027 is also intended to increase the profitability of investments and strengthen companies' liquidity. The new depreciation allowances will apply from June 30, 2025, with 75% of the cost of electric vehicles being tax deductible in the year of purchase. At the same time, the bill stipulates that the relief for companies will increase the amount from 2.5 billion euros in 2025 to 11.3 billion euros in 2029, while the shortfall in tax revenue for the state will increase from 630 million euros in 2025 to 17 billion euros in 2029.

These developments are of great importance for the regions affected, as the financial cuts affect both federal, state and local governments and require careful planning to keep the economic and structural consequences as low as possible. The coming weeks will show whether an agreement can be reached between the different levels of government on financial compensation.