The Municipal Fiscal Equalisation System in Saxony

The Saxon municipal fiscal equalisation system has recently been re-examined and continuously improved. For example, the 1996 Fiscal Equalisation Law includes the "separate" state grants aimed at supporting activities of lower level municipal administration offices into the general unconditional intergovernmental transfer system in Saxony. According to the judgement of the Saxon Constitutional Court made on the 23 November 2000, the 1997 Fiscal Equalisation Law is incompatible with the Saxon Constitution, since the law does not force the complete equalisation for covering additional local expenditures caused by the legally delegated activities from the state. In other words, additional transfers should be provided by the state for those municipal activities, which are independent of the local tax capacity. In the context of this study the anticipated applications of this judgement on the current Saxon municipal equalisation system are examined (under the particular consideration of the distribution of state grants among different types of municipalities according to the horizontal parallel development of fiscal capacity, the determination of transfer needs according to the municipal size, the equalisation of special fiscal burden, the general management of local budget, etc.). Apart from the basic multiple-regression analyses, some specific sensitivity analyses are additionally carried out to measure the possible effects mentioned above.