EcoAustria Policy Note 52: Reform options for the Austrian fiscal equalization system

The current period of fiscal equalization expires at the end of this year and its future structure is currently being discussed between the federal government, provinces and municipalities. In this context, EcoAustria has dealt with fundamental considerations for strengthening fiscal decentralization in Austria and submitted proposals for a more efficient and resilient design of the fiscal equalization system.

The current financial equalization system is problematic as it violates key requirements for efficient decentralization. For example, the mixing of competencies in key areas of responsibility, the complex financing structure for numerous public services and the low level of decentralized autonomy with regard to levies mean that political responsibilities are undermined.

Particularly in an international comparison, it can be seen that Austrian federalism is characterized by a very low level of autonomy on the revenue side. Specifically, according to OECD Revenue Statistics, around 7% of expenditure in Austria is financed by the country's own taxes. In contrast, other countries have significantly higher rates at regional level, such as Switzerland with over 50 percent, Spain with over 30 percent and Australia with 27 percent. Accordingly, the financing of regional tasks in Austria is primarily based on revenues from the tax association. Although the share at municipal level is 15 percent, the financing of tasks is also based on joint federal taxes.

Figure 1: Share of own levies in decentralized expenditure in 2019

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Policy Note 52: Reform options for the Austrian fiscal equalization system

Press release: EcoAustria on the upcoming financial equalization

In order to strengthen tax autonomy, a shift in the financing structure of municipalities away from municipal tax and towards property tax is one effective measure. A preferred variant of the reform envisages a broadening of the property tax assessment base with correspondingly lower (collection) rates, which could strengthen fiscal competition. If the implementation of such a reform proves to be too difficult in the short term, it is also possible to abolish the assessment rates altogether with the existing assessment base in order to enable the municipalities to increase their financing via property tax.

It should also be mentioned that public spending is very strongly influenced by the demographic composition of the population, including at a decentralized level (e.g. childcare and education, health or care). As society continues to age, inequalities in funding requirements between federal states and municipalities will become more pronounced. The distribution of financial equalization funds according to determinants of the cost burden instead of the number of inhabitants will therefore become increasingly important.

Figure 2: Forecast of the proportion of 65+ year-olds in the total population in 2050 by region

In summary, EcoAustria recommends the following measures to reform the financial equalization system:

1. target orientation and flexibilization of financial equalization with regard to nationally defined and time-limited political-strategic goals (e.g. climate protection, sustainable spatial development)

2. a significant strengthening of the financing responsibility of the federal states and municipalities by increasing their own levies, whereby growth potential should also be utilized (e.g. reduction in municipal tax or abolition of (surcharge) rates for property tax)

3. task-oriented burden sharing for tasks with spatial spillovers and consideration of the demographic composition of the population to balance out dynamic expenditure trends

4. the establishment of a transparent equalization of resources with the simultaneous abolition of domestic transfers based on financial strength. This should strengthen the incentives to invest in the economic attractiveness of a location

5. ongoing evaluation and unbundling of domestic transfers to increase transparency and accountability and eliminate inconsistencies

Parts of this article have been published as book chapters Köppl-Turyna M. and Strohner L., "Ökonomische Aspekte des Finanzausgleichs und Reformoptionen unter finanzwissenschaftlichen Gesichtspunkten" in the publication "Handbuch der österreichischen Finanzverfassung" Eds. Bussjäger/Haller ISBN 978-3-7003-2237-5 of the Institute of Federalism in April 2022. Further parts have been published as book chapters Köppl-Turyna, M. "Resilienz im österreichischen Föderalismus" in the publication "Krisenfester Finanzausgleich, Herausforderungen und Optionen zur Krisenbewältigung" Eds. Bröthaler, J., Biwald, P., Getzner, M., Mitterer, K., ISBN: 978-3-7083-1393-1 in December 2021.