Fiscal Federalism in Characteristics of Swiss Federalism and Reform Issues

Institute for Management and Regional Economics Stefan Pfaeffli

Lucerne, 7 July 2011 Subjects

. General characteristics of federalist Switzerland

. Tasks and funding of the sub-national level

. Reform of federalism between confederation and cantons

. Organization and role of Municipalities

Slide 2, 7 July 2011

General Characteristics of Federalist Switzerland

Slide 3 , 7 July 2011 Facts and Figures for Switzerland at First Glance

- Area: 41,300 sq km - Population: 7.7 M - Density: 185 persons per sq km - 3 Official Languages: German, French, Italian - Foreigners: 1.735 M ~ 22.1% of pop. 1 - Labor Force: 4.8 M 2 - Unemployment Rate: 2.9% 3 - GDP: $ 666.3 B 4; 535 B CHF - GDP per Capita: $ 86,532; 69,500 CHF - Government Debt: 38.8% of GDP 5

1) April 2011 2)End 2010 3) Mai 2011 4) 2008, at current exchange rate 5) End 2009

Slide 4 , 7 July 2011 Map of Switzerland

Slide 5 , 7 July 2011 Three levels of Government in Switzerland

National Government

26 Cantons 20 full, 6 half

~2700 Municipalities

Slide 6 , 7 July 2011 Characteristics of National Government

- Federal State (Republic) - Strong federalism: principle of subsidiarity - Direct democracy at federal level: - Initiative: 100,000 signatures - Referendum: 50,000 signatures - Organization of Government: Big Coalition, currently center right (2 SP, 1 CVP, 2 FDP, 1 SVP, 1 BDP); Election by Parliament; Term of office: 4 years - Parliament: Two-Chamber-System: National Council (Representatives of citizens; elected proportionally) Council of States (Senate; two representatives per Canton)

Slide 7 , 7 July 2011 Principles of the Distribution of Power between the Cantons and the Confederation

-Federal authority only if stipulated in federal constitution -Federal constitution must enumerate all federal powers individually and completely New public tasks are initially within the authority of the cantons New federal powers require an amendment of the federal constitution An amendment of the federal constitution always demands a referendum with a double majority, majority of states and citizens This rule on the assignment of power eliminates confusion.

Slide 8 , 7 July 2011 State Entities and Para-State

State Entities

- Confederation: central government

- Cantons 40,756,63 o 20 Full Cantons + 6 Half Cantons 8 o With cantonal laws and high level of 24% 57,234,09 autonomy 7 34% - Municipalities o ~ 2700 o Tasks / Position depends on canton 71,084,52 o Average size of municipality: 2400 persons 0 o Local autonomy (within limits): 42% organization, funding, execution of mandatory and voluntary tasks

Para-State Sector Confederation Cantons Municipalities - Postal service, Railway, Social Insurance, Power supply, …

Slide 9 , 7 July 2011 Cantonal DisparitiesKantonale Disparitäten

20.0% 120000

18.0% Flächenanteil 100000 Bevölkerungsanteil

16.0% 107592 VE pro Kopf

14.0% Situation 2004 92168 80000

12.0%

10.0% 69865 60000

68450

67375

in CHF in

Anteile 61223

8.0%

53916 51917

51474 40000

49336

48401

48153 45946

6.0% 45873

45492

44845

44374

44230

44103

43488

42592

40577

38760 38762 38562 4.0% 36850 20000

2.0%

0.0% 0 AG AR AI BS BL BE FR GE GL GR JU LU NE NW OW SG SH SZ SO TI TG UR VD VS ZG ZH

Slide 10, 7 July 2011 Political Steering Power (Broad Overview)

Municipalities Municipalities with Local without Local Area Confederation Cantons Parliaments Parliaments

Election of Government Parliament Citizens Citizens Citizens

Election of Parliament Citizens of Ct. Citizens Citizens ----

Constitution Citizens &. Ct. Citizens Citizens Citizens Parliament, sometimes Law Parliament also Citizens Parliament Citizens

Initiative Citizens &. Ct. Citizens Citizens Citizens

Referendum Citizens & Ct. Citizens Citizens Citizens Approval of Financial Statement Parliament Parliament Parliament Citizens

Adoption of New Budget Parliament Parliament Parliament Citizens

Approval of Taxes Parliament Parliament Parliament Citizens

Slide 11 , 7 July 2011 Tasks and Funding on Sub-National Level

Slide 12 , 7 July 2011 Current Distribution of Tasks between Confederation, Cantons and Municipalities

Soicial Protection

Education

Recreation, Culture, and Religion

Health

Housing and Community Amenities

Environmental Protection

Economic Affairs

Public Order and Safety

Defense

General Public Services

0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 Data 2005 Data 2008 Confederation Cantons Municipalities

Slide 13 , 7 July 2011 Main Tasks of Cantons (Expenses in 1000 CHF in 2008)

Soicial Protection 13,647,867

Education 20,907,559

Recreation, Culture, and Religion 1,542,273

Health 9,004,105

Housing and Community Amenities 204,213

Environmental Protection 643,270

Economic Affairs 10,586,594

Public Order and Safety 5,669,565

Defense 212,232

General Public Services 8,666,842

0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000

Slide 14 , 7 July 2011 15.08.05

Revenue-Splitting

Taxed Object Confederation Cantons Municipalities Incomes Direct Federal Tax Direct Income Tax Supplement Wealth Tax on Wealth Supplement Profit Tax on Profit Tax on Profit Tax on Profit Capital Tax on Capital Tax on Capital Consumption Value Added Tax Consumption of Particular Goods e.g. gasoline

Inheritance/Gifts optional possibly Particular Public Services on Demand Charges Charges Charges

Not complete!

Slide 15 , 7 July 2011 System of Tax Sharing in Switzerland T M

C M

1U

C N

R

Slide 16 , 7 July 2011 Use and Weight of Taxes and Charges

Data from 2008

Weight of Income Sources Other

Tariffs Other 0.8% Tariffs 0.8% Motor Vehicle Tax &… Motor Vehicle Tax & Charges 3.4% Inheritance Tax Inheritance Tax 0.7% Capital Transfer Tax Capital Transfer Tax 0.9% Capital Gains Tax Capital Gains Tax 1.2% Withholding Tax Withholding Tax 5.3% Consumption Taxes Consumption Taxes 25.6% Land Value Tax Land Value Tax 0.8% Tax on Capital Tax on Capital 1.3% Tax on Profits Tax on Profits 14.5%

Wealth Tax Wealth Tax 4.4%

Income Tax Income Tax 40.4%

0% 20% 40% 60% 80% 100% 0.0% 10.0%20.0%30.0%40.0%50.0%

Confederation Cantons Municipalities

Slide 17 , 7 July 2011 Splitting of Main Revenue among Levels of Government

- Revenue of individuals and of legal entities are taxed by all three levels of government

- Wealth is only taxed by cantons and municipalities

- Although revenue sources are split among the levels, there are no fixed quotas in place - Tax laws are enacted by cantons. The cantons determine deductions, tax scales and tax units

- Municipal Supplements are determined by each municipality

- Tax on consumption only belongs to the Confederation

- Charges are levied only by cantons and the municipalities

Slide 18 , 7 July 2011 Divergence of Tax Burdens in the Cantons Tax-Burden Index for a family with 2 children in 2006 (income and wealth tax by canton, municipality and church) JU 137.7 GE 78.2 NE 174.3 VS 111.2 VD 90.2 TI 47.8 TG 65 AG 85 GR 135 SG 122.5 AI 136.5 AR 148.6 SH 122.6 BL 108 BS 100 SO 119.6 FR 115 ZG 43.3 GL 180 NW 96.1 O 184.6 SZ 80.7 UR 207.3 LU 129.1 BE 114.8 ZH 89.2 highest : lowest = 4.79 0 50 100 150 200 250 Slide 19 , 7 July 2011 Reforming Federalism Confederation - Cantons

Slide 20 , 7 July 2011 Reforming Federalism in Switzerland

Overview in in the broader sense . New assignment of tasks and finances Financial equalization (in place since 01/01/2008) - New assignment of tasks - New assignment of costs and finances - Fine-tuning by financial equalization

in the stricter sense

. Territory reform especially at municipal level

. Reform projects at the upper levels (confederation- cantons) and lower levels (cantons-municipalities)

Slide 21 , 7 July 2011 NFA – the Paramount Reform of Federalism

1. Clarification of functional responsibilities of each state level i. Disentanglement of responsibilities ii. Improve vertical collaboration between federal and cantonal level steering of shared functions (program approach) iii. Foster horizontal collaboration among cantons

2. Reduce discrepancies between cantons i. Resource leveling (minimum funding level) ii. Compensation of extra costs (topographic and socio-demographic

Slide 22 , 7 July 2011 New Assignment of Tasks I: Disentanglement (effective since 2008)

Centralization Cantonalization

- Retirement Insurance - Homes for the elderly: contribution for construction - Disability Insurance and operation - Highways - Special Education o Construction - Home Care o Management - Education in Social Professions o Maintenance - Grants below University Level - Agricultural Consultation - Voluntary School Sports Centers - Separation of Traffic outside o Breeding of farm animals Urban Areas: Modernization of Railroad Crossings - Airports - Subsidies for Construction in Montain Areas - Direct Advice to Farmers

Slide 23 , 7 July 2011 New Assignment of Tasks II:

Simplified Collaboration between Confederation and Cantons

Premium Reduction in Health Insurance Fixed Contribution Supplementary Aid for the Elderly no grading related Regional Public Transportation to financial strength

Traffic in Urban Areas Noise Management Protecting Nature and Landscape Flood Prevention Program Budgeting Water Conservation Improving Farming Structures Forests, Hunting, Fishing

Main Roads Earmarked Grant

Official Land Survey Management by Objectives from Confederation to Cantons

Slide 24 , 7 July 2011 New Assignment of Tasks III: Improved Collaboration among Cantons

- Integration of Disabled Persons - Cutting Edge Medicine, Specialized Hospitals Inter-Cantonal Framework of Horizontal Cooperation - Cantonal Universities - optimized across cantons - Universities of Applied Sciences - who takes advantage = who decides - Urban Transportation = who pays - more efficiency - Prominent Theaters, Museums, etc. - Waste Management - Sewage

Slide 25 , 7 July 2011 15.08.05 Financial Equalization (in the stricter sense) Confederation

590 M CHF 1,557 M CHF

Cost Compensation Resource Leveling GCC SCC VRL HRL

295 M CHF 295 M CHF 2,646 M CHF 1,090 M CHF Cantons with Extra Burdens

Resources-Weak Cantons Resources-Strong Cantons

GCC = Geographic-Topographic Cost Compensation SLC = Socio-Demographic Cost Compensation HRL = Horizontal Resource Leveling VRL = Vertical Resource Leveling

Slide 26 , 7 July 2011 NFA Resource Leveling

Slide 27 , 7 July 2011 NFA – Geographic-Topographic Cost Compensation

Slide 28 , 7 July 2011 NFA – Socio-Demographic Cost Compensation

Slide 29 , 7 July 2011 Organization and Role of Municipalities

Slide 30 , 7 July 2011 Municipality – Standard Organization

Citizens o Ballot Box Citizens o Municipal Meeting

Municipal Parliament (not mandatory)

Audit Committee Parliament

Controlling Commission (voluntary) o Advise on political steering o Participate in control cycle Audit Committee Controlling Commission Municipal Government o 3-7 members / principle of collegiality o Directly elected by municipal citizens o Proportional vote frequent, Municipal Government but not mandatory

Commission

Administration Municipal Administration Commissions

Slide 31 , 7 July 2011 Main Tasks for Municipalities

Organization of Municipality - Management System - Election of Local Government Bodies - Human Resources Tax Collection - Cantonal taxes - Local taxes (municipality, church) Maintaining Order / Rescue Services - Building Inspection - Fire Brigade Registration - Residents, birth, death, marriage Education - Elementary School and Kindergarden - Music Schools Social Welfare - Social Aid - Retirement Homes, Nursing Homes Health - Home Care Traffic - Regional and urban public transportation - Municipal roads Environment and Development - Sewage and waste management - Spacial planning Culture, Leisure, Sports - Centers for culture, leisure and sports for the municipality, e.g. libraries, theatres, museums, concert halls, stadiums, ice skating rinks, swimming pools, playgrounds Votes and Elections - Organizing and conducting federal, cantonal and municipal votes and elections

Slide 32 , 7 July 2011 Financial Responsibility of Municipality

Investment Grants Revenues Earmarked 3% 13% Grants not Earmarked 4% Taxes 48%

Charges Only 17% 26% Permits, Licences are Grants! 0%

Returns on Figures 2005 Assets 6% Slide 33 , 7 July 2011 Disparities in Tax Burden in the Area 2007 1.6 1.95 Schwarzenberg 1.6 2.40

Rothenburg 1.6 1.90 Root 1.6 1.80

Rain 1.6 1.95

Meierskappel 1.6 2.25

Meggen 1.6 1.15 1.6 2.35 Luzern 1.6 1.85 1.6 2.20 1.6 2.00 1.6 1.70 Honau 1.6 1.60 Hildisrieden 1.6 1.90

1.6 1.85 Kanton 1.6 1.80 Gemeinde

Eschenbach 1.6 1.50 High :Low High:Low = 2.1 Emmen 1.6 2.05

1.6 1.95

Ebikon only Taxes Municipal 1.6 1.70 1.6 2.05 1.6 1.95

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Slide 34 , 7 July 2011 Reforming Federalism within Cantons - “Luzern ’99 – Gemeindereform 2000+”

- Duration of project 1997-2008 - Goals - More efficient municipalities - Improved municipal capacity to respond to citizens’ needs - Better partnership between municipalities and Canton - Content of project - Better distribution of tasks: disentanglement / congruence of power and responsibility - More efficient financial equalization - Resource leveling - Cost compensation - Improvement of external structures - Better collaboration among municipalities - Merging municipalities - Improving internal structures (new Municipal Law)

- Clearer distinction between strategic and operative functions: Role of government and administration - More management (new instruments for planning and controlling) - Medium-term planning of tasks and finances, annual plan, annual budget (before only financial plan and budget mandatory) - Cost accounting (showing full costs, more transparency) - Three options for annual budget statement: cost-accounting, NPM or cash-based format - Reduced Cantonal Monitoring (more responsibility for municipality) - Limited to four areas: democratic standards, rule of law, minimal administrative requirements and the existence of a controlling system CS. The CS must follow the Municipal Statute; annual budget, medium term planning, annual plan, annual report and statement are in place. - Canton may not interfere with implementation and evaluation of policy, unless required by special law. - Inter-municipal collaboration

Slide 35 , 7 July 2011 Municipal Autonomy and State Liability

- Reforming federalism  more room for action for the municipalities - More opportunities – more risks! - Cantonal liability for municipalities – yes or no? “Moral hazard” – problem - Severe conditions for the Canton’s liability: oGuarantee of Canton for Municipality oPoor supervision oDirect cause of poor supervision; proof of causation

No more Zero-Deficit Guarantee Monitoring only summarily

Slide 36 , 7 July 2011