Eight Years After Real Estate Transfer Tax Reform: Most German States Seize Opportunity for Tax Increases

The financial relationship between central government and the federal states is about to undergo major reforms. In addition to reorganizing financial equalization, policy-makers are now discussing providing financial aid for structurally weak regions once the Solidarity Pact expires, bolstering the general financial strength of states and establishing an effective debt ceiling. Against this backdrop, the present report examines reform of real estate transfer tax, which is considered to be one of the most important results of the fiscal federalism reform in 2006. Since then, states have been able to determine their own tax rates. The report also analyzes the pros and cons of the real estate transfer tax in detail. The states’ newly acquired fiscal autonomy has triggered considerable dynamism. With the exception of Bavaria and Saxony, all the federal states have seized the opportunity to raise the real estate transfer tax over the past eight years. Today, it is by far the most important independent tax revenue for each state and is the only tax that allows them to set their own rate. However, tax revenue measured against total income, i.e., including community taxes, federal grants, and financial equalization, is relatively low. An international comparison shows that Germany is at the upper end of the scale when it comes to tax rates on real estate transfer.