Berlin On Tuesday, a hearing will take place in front of the Federal Fiscal Court (BFH) in Munich with potentially billions of dollars in impact. It revolves around the question of whether the solidarity surcharge is unconstitutional. For taxpayers with high incomes, it may be a relief of a thousand euros and more a year, for the federal budget it is about the loss of income of around twelve billion euros.
The Handelsblatt answers the most important questions about solos.
The Soli is a supplementary tax to income tax and corporation tax. It was first introduced in 1991 under Chancellor Helmut Kohl (CDU). The reason: the financial impact of the Gulf War. During the Second Gulf War, Germany assumed the costs of around 17 billion Deutschmarks. With the supplementary tax, the Treasury wanted to recoup the money. The first Soli expired in mid-1992. A solidarity surcharge has been levied again since 1995 to finance German unity.
From 1995 to 1997, the solidarity surcharge was 7.5 percent of the assessed income or corporation tax. In 1998 it was lowered to 5.5 percent. In 2019, the Bundestag decided to reduce the solidarity surcharge in favor of low and middle incomes. This means that the supplementary tax will no longer apply to around 90 percent of all taxpayers from 2021. Above all, top earners and companies still have to pay the soli. The justification for the law states that there is still a special financial burden on the federal government due to reunification.
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The traffic light coalition has raised the income limits for the solos. Anyone who has to pay income tax of more than 17,543 euros in 2023 must continue to pay at least part of the surcharge. However, it is not immediately due in full, there is a so-called mitigation zone.
>> Read here: Who would benefit from the elimination of the solidarity surcharge
The economist Frank Hechtner has calculated what the new limits mean for the taxpayer. According to this, a single person does not have to pay any solos up to a monthly gross income of 6670 euros. He is then partially due. From an income of 9720 euros, the solos must be paid in full.
How much money is it for the Treasury?
The solidarity surcharge will bring around 19 billion euros into the federal budget every year until 2021. After the partial abolition, it was just over half, and revenue of around twelve billion euros is expected for the current year. Like all tax revenues, the soli is not earmarked. The federal government alone is entitled to the revenue, so it goes into the federal budget. The funds were never used exclusively for the construction of the East.
What is the Solidarity Pact?
These are financial policy measures to align the living conditions in East and West Germany. Solidarity Pact I came into force in 1994 and expired in 2004. The Solidarity Pact II started in 2005 and expired at the end of 2019. A total of around 200 billion euros in development aid was provided for the eastern federal states.
What is the specific procedure before the Federal Fiscal Court (BFH) about?
It is a model lawsuit (file number IX R 15/20) from the Association of Taxpayers (BdSt). With the help of the association, a couple from Bavaria complained that they should continue to pay the solos from 2020, but the Solidarity Pact II expired at the end of 2019. In addition, the solidarity surcharge was only intended to finance German unity, it should not serve to finance the federal budget in general. Taxpayers also argue that a supplementary tax may only be levied to cover peak demand. This exceptional character would prohibit a perpetual survey. The current restriction to ten percent of taxpayers is also unconstitutional.
What will the judges deal with?
The BFH will also address the question of whether reasons other than the financing of German unity justify the levying of the soli from 2021. A statement from the BFH states: “Here it can be decisive whether an increased financial requirement as a result of the corona pandemic, the Ukraine war or the financial requirement required to combat climate change can justify the continued existence of the solidarity surcharge.” In this case, a decision can also be made be whether such a “redesignation” of the solidarity surcharge requires an express decision by the Bundestag (parliamentary reservation).
What speaks for the fact that the solos are unconstitutional?
Many constitutional law scholars have considered the solidarity surcharge to be constitutionally inadmissible since January 1, 2020 at the latest. So did the former President of the Federal Constitutional Court, Hans-Jürgen Papier. With the end of the Solidarity Pact II, the requirement for the levying of the solidarity surcharge no longer applies. “The legislature was obviously unwilling to avoid what I consider to be a clear violation of the constitution,” explained Papier. “As a result, the federal government runs the risk of having to make substantial tax repayments, much like it had to do with the nuclear fuel tax that was declared unconstitutional.”
>> Read also: Up to 2200 euros more: This is how singles and families benefit from the relief in 2023
The Cologne-based tax lawyer Johanna Hey told the Handelsblatt: “It is evident that the solidarity surcharge has lost its original reason for financing reunification by 2020 at the latest.” incompatible with the basis of the Basic Law.
Hey explains: “The further collection of the solidarity surcharge, which is solely due to the federal government, undermines the revenue distribution provided for in the financial constitution.” The legislator is at liberty to introduce a new supplementary tax for the current special financial needs. However, this requires a new parliamentary decision.
What speaks for the constitutionality of the solidarity surcharge?
Other experts such as the tax lawyer Henning Tappe from the University of Trier, who was supposed to represent the Federal Ministry of Finance at the BFH, see no direct legal connection between the solidarity surcharge and Solidarity Pact II. The law professor points out that the supplementary tax introduced in 1991 on the occasion of the Second Gulf War was also called “solidarity surcharge”. Tappe told the Handelsblatt: “It is therefore not convincing to make the Solidarity Pact II the benchmark for the duration of the solidarity surcharge.”
Even if the solos were used for other purposes – such as “corona solos” or “climate solos” – no reallocation would be necessary. The solidarity surcharge is a tax as a supplementary tax and is therefore not earmarked. “Anything that isn’t dedicated doesn’t have to be rededicated,” says Tappe. The expert also explains that the supplementary levy is in no way limited to “special emergencies”. Rather, the purpose of inserting the “supplementary tax” in the Basic Law was to enable a flexible addition to the federal tax system “as a normal alternative to increasing other taxes”.
What is the position of the Federal Ministry of Finance?
Under Federal Finance Minister Olaf Scholz (SPD), it was planned that representatives of the ministry would also defend the current regulation in court. Scholz is now chancellor and the finance minister is Christian Lindner (FDP). He has now decided that the Ministry of Finance is not involved in the process.
The FDP has long called for the complete abolition of the solo. Although the ministry has not officially expressed doubts about the constitutionality of the soli, the regulation is no longer actively defended.
What happens after the negotiation?
After the hearing on Tuesday, the BFH is expected to announce its decision at the end of January. If the judges are convinced that the solos are unconstitutional, the case is referred to the Federal Constitutional Court. This then checks whether the regulations are compatible with the Basic Law. If the BFH approves the soli, taxpayers have the opportunity to lodge a constitutional complaint with the Federal Constitutional Court against the decision.
More: These reliefs will come to taxpayers in 2023