Analyses and Further Development of Measuring Municipal Expenditure Needs in Saarland

The Ifo Institute has examined the current municipal revenue sharing system in Saarland. After a fundamental examination of the allocative incentive effects and the distribution effects of the system, the structural changes of municipal needs that necessitate an up-dating in the distribution regulations were studied. The traditional needs measurement method on the basis of weighting the number of inhabitants can no longer be justified as the suitable one. Apart from the well-acknowledged dispute whether the weighted number of inhabitants is an appropriate index for the higher municipal expenditure needs, statistical restrictions lead to the failure of the regression approach aimed at establishing and exploiting a just weighting scales. As a consequence, it is suggested that such a differentiated weighting system be abandoned and all inhabitants weighted at the same rate in the future, regardless of the size of municipalities. Besides the major weighting system, various additional weighting systems have recently been applied in Saarland. In particular, the purpose and the effects of such additional systems on the fiscal situation of the individual municipalities are carefully examined in the scope of the study. The fiscal justification and feasibility of the so-called employment weighting system is examined as the extra additional weighting system to be integrated in the Saar fiscal equalisation framework. The introduction of such a weighting system is one of the major reform recommendations made in the context of this study. Apart from the positive effects related to the size of labour force, its increase is also accompanied by some additional negative (financial) burdens for municipalities. Thus, the employment weighting system primarily aims at compensating such extra financial stress for those municipalities on which labour forces are concentrated. Furthermore, such a system provides additional incentives for municipalities to attract private firms, since the employment expansion is automatically accounted in the fiscal equalisation system in a positive way.