The DIW Berlin reports a decline in investment activities, the main result of substantial financial problems at the local level, according to the current DIW Wochenbericht. Local finances depend heavily on the Länder, whichhave consolidated their finances over the last few years at the cost of the municipalities. Tax revenues are also performing poorly at the moment. Local budgetary law sets strict limits on borrowings, and as a result, impending budget deficits can only be avoided by quickly reducing expenditures. Thus, investments - as the most flexible form of expenditures - are suffering most severely.
At its core, financial reform has to improve the municipalities' financial leeway by increasing tax revenues. At the same time, it is also necessary to make local tax revenues less dependent on the economic situation, so that municipalities can fulfil their local tasks more consistently. When imposing taxes on residents, municipalities should be given the right to increase income taxes. The local property tax should be adjusted to a more modern taxation basis. The DIW Berlin also argues for sticking to a local business tax. Reorganising the trade tax into a tax on the net product of all businesses would bring local authorities into closer contact with the local economy, which for it part benefits from local infrastructure facilities. A broadening of the taxation base would considerably reduce tax rates. Generally speaking, such a reform would help concentrate the local redistribution of revenues on its role of providing supplementation and redistribution.