What Is the Difference Between the Revenue Sources of the Federal Government and the German States?

Introduction

Germany’s political and fiscal system is built on a federal structure. This means that state power is divided between the federal level (Bund) and the 16 federal states (Länder).

This division does not only affect political responsibilities, but also the tax and public finance system.

So what exactly is the difference between the revenue sources of the federal government and those of the Länder?

In this article, we provide a clear comparison that explains how each level is funded, which taxes go where, and how financial transfers work.

1. General Overview of the German Fiscal System

Public finances in Germany are organized on three levels:

• Federal government (Bund)

• States (Länder)

• Municipalities (Kommunen)

The distribution of revenues between these levels is laid down in the German Basic Law (Grundgesetz). The main goals are:

• efficiency,

• financial balance, and

• fairness between regions.

2. Revenue Sources of the Federal Government (Bund)

The federal government draws on several main sources of income:

2.1 Share in Joint Taxes (Gemeinschaftsteuern)

The most important joint taxes are:

• Income tax (Einkommensteuer)

• Corporate tax (Körperschaftsteuer)

• Value added tax (VAT / Mehrwertsteuer)

These taxes are collected centrally and then shared between the Bund, the Länder and the municipalities according to fixed formulas. The federal government receives a legally defined share.

2.2 Federal-Only Taxes

Some taxes accrue exclusively to the Bund, in particular consumption/excise taxes, such as:

• Tobacco tax

• Energy tax

• Alcohol tax

These receipts flow directly into the federal budget.

2.3 Non-tax Revenues

The Bund also earns money from:

• Profits of state-owned enterprises (e.g. federal railways, postal services, infrastructure holdings)

• Federal fees (e.g. for issuing passports and ID documents)

• Fines and penalties in areas of federal competence

• Sale or leasing of federal property

2.4 Public Borrowing by the Federation

The federal government can finance deficits through public borrowing.

However, this is strictly limited by the “debt brake” (Schuldenbremse) enshrined in the Basic Law. Only in exceptional situations (e.g. severe crises) may the Bund significantly increase its debt levels.

3. Revenue Sources of the German States (Länder)

The Länder have a somewhat different revenue structure:

3.1 Share in Joint Taxes

The states, like the Bund, receive shares of the three major joint taxes:

• Income tax

• Corporate tax

• VAT (Mehrwertsteuer)

Distribution is based on:

• population size, and

• tax-raising capacity of each Land

Part of VAT is also explicitly used to reduce differences in financial strength between the Länder.

3.2 State-Only Taxes

Certain taxes accrue solely to the Länder, for example:

• Real estate transfer tax (Grunderwerbsteuer)

• Inheritance and gift tax (Erbschaftsteuer)

• Gambling and casino taxes

These revenues go directly into the state budgets.

3.3 Financial Equalisation (Länderfinanzausgleich)

A key element of German federalism is financial equalisation between the states, consisting of:

• Vertical transfers: payments and grants from the Bund to fiscally weaker states

• Horizontal transfers: payments between wealthier and poorer Länder

The aim is to ensure that all Länder are financially able to fulfil their constitutional tasks, regardless of their own tax base.

3.4 Non-tax Revenues of the States

These include, among other things:

• University and administrative fees (where applicable)

• Income from state property (real estate, shareholdings)

• Profits of state-owned enterprises

• Various administrative and court fees, e.g. for:

  • vehicle registration

  • judicial proceedings

  • official certifications

4. Key Differences Between Federal and State Revenues

A simplified comparison:

5. Why Does This Division Matter?

The separation of revenue sources and fiscal responsibilities serves several purposes:

• It guarantees the financial autonomy of the Länder, especially in education, culture, internal security and social services.

• It enables solidarity and redistribution between rich and poor regions through financial equalisation.

• It prevents over-centralisation, as political and fiscal power is shared between different levels of government.

• It promotes more efficient spending, because many decisions are made closer to the citizens they affect.

6. Conclusion

While the federal government and the Länder share some major taxes, each level has its own distinct revenue sources and its own fiscal sovereignty.

This system:

• reflects Germany’s federal character,

• strengthens the political and financial independence of the states, and

• helps to secure a relatively balanced standard of living across the country.

To truly understand how public money is raised and spent in Germany, you always have to look at both levels together:
the Bund and the Länder – closely interlinked, but financially clearly separated.

The editorial team of this website strives to provide accurate information based on solid research and multiple sources. However, laws and regulations may change, and errors cannot be ruled out completely. Please treat this article as an initial guide, and always consult the competent authorities and official sources for binding and up-to-date information.