Inhabitant weighting in the fiscal equalisation scheme - economic analysis and reform requirements

A controversial problem in Germany at the moment is the reform of the fiscal equalisation scheme necessitated by the decision of the constitutional court on 11 November 1999. A central aspect is the examination of the privileges enjoyed by the three city-states, Hamburg, Bremen and Berlin, under the current system. Possible extra requirements of the city states, in the opinion of the judges, must "be demonstrably appropriate on the basis of reliable and objective indicators". The study by the Ifo Institute, in collaboration with Prof. Bernd Huber, University of Munich, Dr. Karl Lichtblau, Institute of the German Economy in Cologne, and the Center for European Economic Research, concluded that the special situation of the city states must continue to be respected. However, the weighting given to the city states in the current fiscal equalisation scheme must be reduced, and a new, more differentiated system must be introduced. Likewise for sparsely populated Länder, no additional requirements can be claimed. An inhabitant weighting scheme is not necessary here.