Main and Finance Committee discusses raising the trade tax rate

Minimum allocation to be achieved

The city of Hof faces the challenge of achieving the so-called minimum transfer from the administrative budget to the asset budget in the 2024 budget. This is the sum of the ordinary repayment of existing loans. There is still a gap of €1,279,020 in revenue for this. "The minimum allocation is a decisive criterion when it comes to the question of whether our budget can be approved by the government and certified as sustainable," says treasurer Peter Fischer. An increase in the trade tax rate is one possible means of achieving this. The main and finance committee therefore discussed a possible trade tax increase at its most recent meeting.

Ministry of Finance calls for efforts

On 19 December 2023, representatives of the Bavarian State Ministry of Finance and Home Affairs emphasized in an on-site meeting that the city of Hof must make its willingness to consolidate clear in the long term. This was confirmed again by email last week. In addition to expenditure savings, the letter also referred to the possibility of increasing the assessment rates for property and trade tax and thus the city's revenue.

Treasurer's office presents three proposals

An increase in property tax from the current 410 points will not be implemented. After all, this will be subject to a major reform from 2025 anyway. Instead, the finance department has proposed three different options for increasing the trade tax rate to the main and finance committee: an increase in the current rate of 400% by 15, 10 or 5 percentage points for a period of three years. After the three years 2024, 2025 and 2026, the assessment rate would return to 400% in 2027. With this proposal, either €1,200,000, €800,000 or €400,000 in additional revenue could be generated each year until the end of 2026, thereby demonstrating the will to consolidate.

City Council decides on April 15

The main and finance committee has deliberated, but no unanimous recommendation has been reached. Until the next meeting of the Main and Finance Committee on April 8, 2024, the parliamentary groups can send questions to the City Treasurer's Office so that any ambiguities can be clarified. The City Council must then make a decision on April 15, 2024 as to whether or not the collection rate statutes will be adjusted. This in turn has an impact on the subsequent resolution on the Hof 2024 budget.

Arguments for and against

Following the above-mentioned statements from the Ministry, the treasury department initially proposed an internal increase in the trade tax rate to 420 percentage points with retroactive effect from January 1, 2024. "This measure could generate additional annual revenue of 1.6 million euros. However, both supporters and opponents of this increase are represented in the city administration, each with understandable arguments," says Peter Fischer.

One argument against an increase is that the city of Hof must try to retain existing businesses and attract new ones in order to improve its financial situation. A higher trade tax rate would be rather disadvantageous, as the current rate of 400% already exceeds the rate for comparable independent towns in Bavaria. Especially in the current situation, an additional burden on the economy could be a negative signal for Hof as a business location.

The fact that the increase in the assessment rate from the current 400% to 420% would even exceed the required minimum allocation in 2024 without any further cuts in expenditure is an argument in favor of the increase. In addition, natural persons and partnerships, e.g. GmbH and Co. KG, could offset this increase against tax, which would not result in any additional burden for them overall. Freelancers are also not affected, as they do not pay trade tax. Only corporations, e.g. GmbHs, would actually be affected by the increase in the assessment rate. For them, an increase in the assessment rate of 10 percentage points, for example, means an actual additional tax payment of 2.5%.

In addition, the fee increases decided so far in the budget consolidation in 2024 primarily affect individuals, e.g. the increase in parking fees after a long period of stable prices. By increasing the trade tax rate, businesses and in particular corporations would also share in the immense costs of the infrastructure in the city of Hof. Furthermore, it is not the turnover that is taxed, but the profit of a commercial business. This only "reduces" the profit and therefore the return on equity. Under no circumstances does this create the risk of short-term insolvency. Limiting the period to three years is also intended to give companies planning security. On the one hand, established companies should be able to rely on the fact that things will then become more favorable for them again. On the other hand, new companies should not be deterred from relocating.

A difficult decision

"The decision to temporarily increase the trade tax is extremely difficult for the city council. We looked intensively at various options in advance and weighed them up carefully. As a city, we must of course take the Ministry of Finance's request to set an example seriously. However, there are pros and cons when weighing up the options. It is clear that we have to move a little, which no one does lightly. My job is quite clearly to create a balance of interests and to work out a balanced compromise with all forces," says Mayor Eva Döhla.

Peter Fischer adds: "The financial situation of the city of Hof in 2024 is so tight that the arguments in favor of increasing the trade tax rate clearly outweigh the counter-arguments. There is also a realistic chance of clearly demonstrating the city of Hof's willingness to consolidate to the Ministry of Finance and obtaining stabilization aid of several million euros again in 2024. This would have a significant positive impact on Hof's schools and infrastructure in the form of bridges and roads, so that both the residents of Hof and businesses can benefit from it."