Fiscal Federalism (latest update March 2018)
The General Government sector in Austria comprises four sub-sectors: the Federal Government (Bund), 9 State Governments (Laender), 2.098 Local Governments (Gemeinden) and Social Security Institutions (not included in the system of fiscal equalization). According to constitutional law, the Federal and the 9 Laender Governments are autonomous with respect to administration and legislation.
In Austria most federal laws are administered by Laender authorities. An important exception to this administration by Laender authorities is the fiscal administration: Austria’s revenue offices are managed by the federal level.
The Laender and municipalities are autonomous and have the right to self-government (municipalities supervised by the Laender, e.g. local budgets).
Intergovernmental Fiscal Relations
The constitutional charter of Austria (Bundes-Verfassungsgesetz) outlines the competencies of Federal, Laender and Local Governments to act as legal entities, to budget autonomously, to own assets and conclude treaties. The competences of the federal government and the Laender in the field of taxation are prescribed in the Fiscal Constitutional Law 1948 (Finanz-Verfassungsgesetz), a special federal constitutional law. The Fiscal Constitutional Law sets the basic principles for financial relations among the layers of governmental (Federal Government, Laender and Municipalities). Most important among them are taxing and tax sharing, cost bearing and transfers rules. While the Fiscal Constitutional Law stipulates the principles, the details of intergovernmental fiscal relations on these principles are regulated by single majority laws of the federal parliament, most important the Intergovernmental Fiscal Relations Act (IFRA). This law usually covers a period of four to six years (current IFRA in force: 2017-2021) and determines taxes to be shared between the three levels of government according to proportion formulas. The IFRA also specifies major transfers/grants between the levels of government. In political practice the rules and contents are drafted unanimously in negotiations between the respective representatives of all governmental levels. Other laws, without time limits, cover special aspects of intergovernmental relations, esp. certain earmarked grants.
The main steps of the process of tax sharing and intergovernmental fiscal relations in Austria are: tax collection, tax sharing and intergovernmental transfers.
Levying of Taxes - Tax Collection
The Federation can legislate for a certain tax if it is at least partially entitled to the tax revenue. If there is no federal share of revenue, legislation remains with the Laender. Municipalities can only regulate local taxes if they are entitled to it by either the federal or state law. Tax administration remains mostly at the federal level. Approximately 95 % of all revenue is levied by federal revenue offices, municipalities levy more than 4 % and Laender less than 1 % of the total revenue.
Tax Sharing - Distribution of Revenues
The second step allocates those taxes that have been defined as shared taxes to the federal government, the Laender, and the municipalities (e.g. income tax, VAT, corporate income tax). This is achieved through a vertical fiscal equalization due to the proportion formulas between the three governmental layers. This procedure is guided by two main criteria:
- tax revenue criteria: allocation is based on regional or local revenue of a tax (performance indicator)
- demographic criteria: allocation is based on the number of inhabitants of a Land or municipality (requirement indicator)
This means, tax revenues are usually either distributed according to fixed quotas based on past regional or local revenue of a tax or according to the number of inhabitants of a Land or municipality. In addition, a proportion of 12.8% of the municipalities´ share in shared tax revenues is allocated via the Laender and used for needy municipalities and capital investments (e.g. infrastructure projects).
The allocation of revenues from shared taxes across municipalities is based on the weighted population key (WPK): Municipalities with relatively many inhabitants receive more revenues per capita. This formula favors large municipalities. The idea underlying the positive bias is the assumption that larger municipalities have disproportionally larger financial requirements (Brecht’s Law).
The IFRA 2017 implemented a first step towards task orientation concerning the revenue share of Municipalities: It is planned, that the tax revenue share of Municipalities will partly be distributed according to the child care and schooling services they supply from 2018 respectively 2019 on.
Intergovernmental Transfers
The Fiscal Constitutional Law (FCL) anticipates transfers from the Federal level to Laender or Local Governments according to a predefined formula. The taxonomy of grants in the FCL differentiates between grants to cover special needs or purposes of other governments, non-earmarked block grants, special need transfers and earmarked grants. Examples are transfers to equalize the average revenue of Laender and Municipalities (paid by the Federal Government, horizontal effect), a “dynamic guarantee” (guaranteed increase of shared tax revenues compared to the previous year´s average of municipalities/Land) or a fund for lagging municipalities and for intercommunal cooperation, transfers from the Federal Natural Disasters Fund. After this step of intergovernmental transfers, the governmental share on the collected 93.211 bn Euros in 2016 was: Federal gov. level 56.39%, Laender gov. level (excl. Vienna) 22.25%, Vienna 9.17% and Local gov. level 9.44%.
Finally, all other rules for transfers across public legal entities which are not contained in the Fiscal Equalization Law, but are part of other federal or state laws or binding treaties between the Federal Government and the Laender (provinces) are applied. At this step especially state-laws regulate the transfers from Laender Governments to Local Governments as well as from Local Governments to the respective Land. This creates an opaque system of inter-Laender equalization with a positive net outcome for the Laender budgets.
IFRA 2017 - a Reform of the System on Fiscal Relations
Negotiations between the Federal Government, the Laender and the municipalities started in spring 2015 and were successfully closed in November 2016, with an agreement among all fiscal-relation-partners and the signing of the Pact on a new Intergovernmental Fiscal Relations Act 2017 (IFRA 2017) by the representatives of the Federal Government, the Laender and of the Municipalities.
The new IFRA is a first step towards more task-orientation, more transparency and simplification and stronger tax autonomy of the Laender.
With a system of benchmarks and spending reviews to be developed, new instruments to support administrative reforms have been agreed. Furthermore, it was agreed on supporting a reform of the Federal Constitution, taking into account the work of the Austria-Convention.
Further steps were also agreed regarding the preparation and implementation of the new harmonized accounting rules as laid down in the regulation on the form and structure of budgets and balance sheets of Laender and Local Governments (Voranschlags- und Rechnungsabschlussverordnung 2015, VRV). The VRV 2015 is oriented on IPSAS and implements accrual accounting for subnational governments in Austria. In the area of climate protection, it was concluded that a formal contract between the Federal Government and the Laender according to Article 15a of the Austrian Constitution should be agreed to implement measures in the building sector.
Natural Disaster Fund
Due to its topography – e.g. alpine regions and a flat eastern Danube river basin, Austria is exposed to natural disasters (mostly floods, torrents and avalanches). The natural disaster fund is installed at federal level at the Ministry of Finance. It was established to finance preventive measures against natural disasters and to cover incurred losses caused by natural disasters. The fund covers to a large extent the expenditures for protective measures against floods, torrents and avalanches and therefore supports the Laender to help and reconstruct infrastructure of Laender and municipalities. Partly this fund also covers expenditures of the provinces for equipment of fire brigades for disaster relief.
The fund is financed by earmarked percentages of the revenue of the following taxes: income tax, wage tax, tax on capital yields and corporation tax. In 2017 expenditures amounted to EUR 361, 4 m (=0.1% of GDP).