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The deduction of special expenses for health insurance contributions must take account of the expenditure of the taxable person essential to maintain a minimum standard of living
Press Release No. 32/2008 of 14 March 2008
Order of 13 February 2008
2 BvL 1/06
According to § 10.1 no. 2 letter a in conjunction with § 10.3 of the Income Tax Act (Einkommensteuergesetz - EStG) in the version applicable to the year under dispute (1997), the possibility of a deduction of special expenses for contributions to private health insurance is restricted as to its amount. The Federal Finance Court (Bundesfinanzhof) considers this restriction to be unconstitutional because the statutory maximum amounts do not enable taxable persons to acquire a suitable amount of health insurance protection. For this reason, it submitted the question to the Federal Constitutional Court. The submission is based on the case of a freelance lawyer and his non-working wife who are the parents of six children. All family members were in private health and long-term care insurance in 1997. The contributions amounted to DM 36,032.47. In their 1997 income tax declaration they claimed provident expenses totalling roughly DM 66,000, including the above health and long-term care insurance contributions. The total amount permitted for deduction by the finance office, referring to § 10.3 EStG, was however only DM 19,830.
The Second Senate of the Federal Constitutional Court found that § 10.1 no. 2 letter a in conjunction with § 10.3 EStG, as well as all subsequent versions, are incompatible with the Basic Law (Grundgesetz - GG) insofar as the deduction of special expenses does not sufficiently cover the contributions to private health insurance and private long-term care insurance which are necessary in terms of their quantity in order to guarantee to the taxable person and his or her family health services and long-term care at a level equivalent to social assistance. The legislature is obliged to create a new provision with effect as per 1 January 2010 at the latest. The income-tax law provisions in question, as well as the subsequent provisions, remain applicable until this time.
In essence, the ruling is based on the following considerations:
I. § 10.1 no. 2 letter a in conjunction with § 10.3 EStG in the version applicable for the assessment period 1997 does not violate the general principle of equality with regard to the fact that the advance deduction which is granted to the self-employed for their contributions to private health and long-term care insurance is less than the corresponding amounts of the employer's provident payments for employees (in particular employer contributions to social insurance) in accordance with § 3 no. 62 sentence 1 EStG .
The contributions made by members of statutory health insurance serve not only to insure against their own risk of illness, but at the same time serve the purpose of social equalisation and redistribution. In addition to decoupling the amount of contributions from the insured illness risk, the level of benefits is also largely independent of the amount of the contributions paid. The assessment of the contributions to private health insurance is, by contrast, in line with the insured risk. One may hence presume in private health insurance contributions that a higher contribution entails a greater advantage for the contributor. Against the background of these major differences in the system, the legislature has not overstepped its margin of appreciation on determining the amount of advance deduction on the one hand and the structure of the reduction regulation for employees subject to obligatory social insurance on the other. In terms of its amount, advance deduction grants an incomplete, but nonetheless tangible reduction in the burden on health and long-term care insurance contributions of taxable persons, and hence takes account of the need for compensation in a manner which is evidently not arbitrary
II. The provision contained in § 10.1 no. 2 letter a in conjunction with § 10.3 EStG in the version applicable to the assessment period 1997 is however incompatible with the Basic Law insofar as the contributions to private health insurance and private long-term care insurance are not adequately covered which are necessary as to their scope in order to guarantee to the taxable person and his or her family healthcare and long-term care at a level equivalent to social assistance. This also applies to the subsequent versions of the statute.
1. In accordance with the principle of a tax-free minimum income, the state is to exempt the income of a citizen from tax insofar as the latter needs it to create the minimum preconditions of a dignified existence for themselves and their family. Protection of a standard of living at social-assistance level is guaranteed. The principle of the tax exemption of a minimum income protects not only what is called the material minimum income (e.g. expenditure for food, clothing, household goods, home and heating). Contributions to private insurance for the case of illness and need of long-term care may also be elements of a minimum income to be taken into consideration in terms of income tax, given that healthcare and long-term care are also an integral element of the list of social assistance benefits.
2. It cannot be ascertained that § 10.1 no. 2 letter a, in conjunction with § 10.3 EStG, provides quantitatively sufficient fiscal exemption of the contributions to private health and long-term care insurance required to ensure a minimum income. If - in the context of a review of evident errors - one looks at the example of the contributions paid by the plaintiffs of the original proceedings, it is revealed that there is evidently no guarantee of their fiscal burden being sufficiently reduced.
As regards the goal of a realistic exemption of a minimum income set out in § 10.1 no. 2 letter a EStG, the legislature has not logically implemented the fundamental decision on reducing burdens in the maximums of § 10.3 of the Income Tax Act for health insurance. The legislature handing down the fiscal legislation is not constitutionally obliged always to fully take account of contributions to "normal" private health insurance. Rather, only the expenditure necessary to attain a standard of living that is in line with social assistance must be considered. The legislature may hence indicate to those with private insurance that a part of their contributions is not taken into consideration in terms of income tax insofar as, in its estimation, the level of services provided by private health insurance is customarily above the level of social assistance, which in turn is coupled to the level of statutory health insurance. The legislature has however evidently not taken a decision which is borne by such considerations and orientated in line with corresponding assessments. The same lack of logical orientation is also to be ascertained with regard to the contributions to private obligatory long-term care insurance. Finally, the same also applies to the children's health insurance since no reduction of their burden whatever is provided in § 10 EStG.
The maximum amounts stipulated in § 10.3 EStG for contributions to private health and long-term care insurance are also not justified for legitimate considerations of a legislative definition of typical facts in bulk proceedings. The legislature has not yet made a decision concerning such definition which comprehensibly links to the health and long-term care insurance expenditure of taxable persons necessary to maintain a minimum standard of living.
3. In reforming the deduction of special expenditure, the legislature must make it clear which share of a maximum amount is exclusively or primarily available for health and long-term care contributions necessary to maintain a minimum standard of living. It must also adhere to the requirements as to logical exemption under fiscal law of the minimum income of taxable persons with statutory health and long-term care insurance, and in doing so must accommodate the degree to which the level of benefits of these branches of social insurance is approximated to that of social assistance or of basic security benefits for job-seekers.
(see Press release no. 33 of 14 March 2008 on the deduction of special expenses for contributions to professional pension facilities for the assessment periods prior to 2005)