The Resumption of the Ecological Tax Reform – Hardly any Improvements for the Environment

Due to their cost efficiency, environmental taxes are usually an important means to provide incentives for environmentally friendly economic activity. However, the ecological tax reform in Germany does not fulfil this objective. The compensation scheme for the manufacturing industry included in the law considerably restricts the incentive to save energy or to reduce pollution, and further makes environmental protection unnecessarily expensive from a macroeconomic perspective. In the case of “newly-founded” (after 1998) businesses in the manufacturing industry, the ecological tax reform even works against one of its main objectives, namely to encourage companies to create jobs, by facilitating dismissals. These are the findings of a current analysis by the Centre for European Economic Research (ZEW) in Mannheim.

The ecological tax reform law plans to pay a compensation to businesses from the manufacturing industry, provided that their taxes on electricity and heating fuels amount to more than DM 1000 per calendar year and to more than 1.2 times the relief prompted by the decrease of the employer’s contribution to state pension insurance. The differential amount between the paid energy tax and 1.2 times the amount of the company’s relief as a result of the decrease of the employer’s contribution to state pension insurance will be compensated. As a result, the effective tax burden of an energy-intensive business does not at all depend on its energy consumption. Its tax liability cannot be reduced by a slight decrease of its energy consumption. Only if the energy consumption is narrowed down to the extent that the compensation does not apply anymore, the tax burden decreases. The ecological steering effect of the current ecological tax is therefore limited to businesses whose energy consumption is lower than the above mentioned threshold value or to businesses that are able to reduce their consumption below this threshold value.

Due to the increase of the tax rates, the problem is further aggravated by the second stage of the ecological tax reform. Since the energy tax will rise again at the beginning of 2000, there will be more businesses receiving compensation than in 1999 with the result that there is no incentive for energy saving left for them. This effect will continue to crop up in the further stages of the ecological tax reform.

It is important to consider the compensation scheme in detail in order to properly assess the impact of the upcoming continuation of the ecological tax reform on the employment situation. In order to calculate the relief resulting from the decrease of the employer’s contribution to state pension insurance, the difference between the contribution rate in the year of the application for reimbursement of the electricity or mineral oil tax and the contribution tax in 1998 will be applied to a contribution basis. For companies founded before 1998 calculations will be based on the contributions of the calendar year 1998, while for companies founded after 1998 calculations will be based on the contributions of the year of application.

As shown above, the level of the tax for energy-intensive companies is determined by the calculated tax relief. In the case of the "older" companies, the relief, and hence the burden of the ecological tax, exclusively depends on the historic contribution basis of 1998 and the statutory contribution rate. For that reason, these companies have no possibility of reducing their ecological tax burden, neither by reducing their energy consumption nor by changing their number of staff. It is a flat-rate tax. What remains of the actual relief by the reduction of ancillary wage costs is the incentive to increase employment on a microeconomic level, which will possibly be thwarted by wage changes on a macroeconomic level.

By contrast, the tax burden for newly-founded, energy-intensive companies in the manufacturing industry obviously brings about a negative employment effect. The current contribution basis of the pension insurance is what applies to them, which in turn depends directly on the number of employees within a company. Thus, a company can decrease itselectricity and mineral oil tax by lowering its number of employees. This incentive even remains when netting out the on-going relief against the pension insurance, since there is still a net burden from ecological taxes and pension scheme contributions of 0.2 times the amount of its relief. Due to the compensation scheme, newly-founded companies will experience this ecological tax as an employment tax, whose best remedy is to dismiss employees.

Contact

Dr. Christoph Böhringer, Phone: +49(0)621/1235-210, E-mail: boehringer@zew.de

Dr. Robert Schwager,  E-mail: schwager@zew.de