Germany: 265. Germany to Create Flood Recovery Fund

The German government has introduced fast track legislation to create a fund from which to finance recovery measures for the parts of Germany affected by the recent Eastern European flood catastrophe. Flood damage estimates currently range as high as Euro 15 billion in Germany alone.

The new Flood Victim Solidarity Law (Flutopfersolidaritätsgesetz) received cabinet approval on Monday, 26 August 2002. Ratification by the German parliament (Bundestag) is expected shortly. The legislation must also be approved by the Federal Council (Bundesrat), a body composed of delegates of the German states (Länder). However, the state governments have agreed to support or at least not oppose the bill, which is accordingly expected to become law before the national elections on 22 September 2002.

The highlights of the Flood Victim Solidarity Law are as follows:

• The reductions in personal income tax scheduled to take effect in 2003 are postponed until 2004.
• The corporation tax rate is increased from 25% to 26.5% for the year 2003 only.
• The additional tax revenue resulting from these measures – estimated at Euro 7.1 billion – will be paid into a special reconstruction assistance fund. The fund's statutory purposes are threefold: (i) to indemnify private households and businesses for flood losses not covered by insurance or otherwise reimbursed; (ii) to rebuild state and local infrastructure; (iii) to rebuild the infrastructure of the Federal government.

While the opposition parties, which control a majority in the Federal Council, have decided not to block the government legislation, they have declared they will repeal it if voted into office in September. The opposition proposes to use the 2002 surplus of the German Bundesbank (national central bank) for disaster relief instead of postponing the 2003 tax cuts.

In 1999 and 2000, the current government enacted the following phased reductions in Germany's personal income tax:

The 1999 and 2000 legislation also evens out the progression between the zero bracket amount and the amount of taxable income at which the top marginal rate is reached (in 2002, roughly Euro 55,000 / 110,000 for singles and married couples respectively).

The Flood Victim Solidarity Law postpones until 2004 the income tax relief originally scheduled for 2003, resulting in an estimated Euro 6.3 billion in additional revenue in 2003. A planned reduction in a deduction available to single parents is also postponed until 2004 to avoid hardship. The 1.5 percentage point increase in the corporation tax is estimated to bring in Euro 791 million in additional revenue.

No change is made in the additional tax cuts scheduled for 2005.

Germany anticipates Euro 1.2 billion in aid from the European Union and is re-directing funds appropriated for other purposes so as to bring the total disaster relief amount to almost Euro 10 billion.

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