A Comparison of Public Revenues Across the Federal States – What Role Do Fiscal Equalization and Other Factors Play?

Kauder Björn

IW-Report No. 41 12. October 2026 Björn Kauder A Comparison of Public Revenues Across the Federal States – What Role Do Fiscal Equalization and Other Factors Play?

To ensure equivalent living conditions, the federal government influences the revenues of the states and municipalities. Under the fiscal equalization system, financially weak states receive surpluses in the distribution of sales tax revenues, while financially strong states must accept shortfalls.

IW-Report No. 41 12. October 2026 Björn Kauder

A Comparison of Public Revenues Across the Federal States – What Role Do Fiscal Equalization and Other Factors Play?

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To ensure equivalent living conditions, the federal government influences the revenues of the states and municipalities. Under the fiscal equalization system, financially weak states receive surpluses in the distribution of sales tax revenues, while financially strong states must accept shortfalls.

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In addition, the federal government provides federal supplemental grants and federal supplemental grants for special needs to further strengthen financially weak states. In addition, there are other ongoing allocations and grants to states and municipalities, such as those for local passenger rail transit, social spending, and debt service assistance.

Regardless of whether redistribution is justified by the principle of connectivity or is based on other motives, it is interesting to consider the extent of this redistribution. What would be the situation for the states and their municipalities if the federal government did not intervene to redistribute funds? This article examines how the distribution of revenue among the federal states and the ranking of the states in terms of revenue are changing. The results show that, as expected, the new federal states, Berlin, Bremen, and Saarland benefit from this distribution, at the expense of Bavaria, Hesse, and Baden-Württemberg. The remaining federal states receive roughly the same amount of funding as they would under a neutral distribution among all residents of Germany. Bavaria, for example, loses 1,168 euros per resident compared to a neutral distribution, while Bremen gains 2,790 euros per resident. This results in shifts in the revenue ranking of up to six positions, so that states that are inherently low-revenue end up, in part, better off than states that are inherently high-revenue because of the federal government’s distribution.

IW-Report No. 41 12. October 2026 Björn Kauder

A Comparison of Public Revenues Across the Federal States – What Role Do Fiscal Equalization and Other Factors Play?

Download PDF

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