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Amended statutory regulations on the "commuter tax allowance" unconstitutional

Press Release No. 103/2008 of 09 December 2008

Judgment of 09 December 2008
2 BvL 1/07

Until 2006, the costs for travelling between home and workplace could be deducted from income liable to income tax as income-related expenses pursuant to § 9 of the Income Tax Act (Einkommensteuergesetz - EStG) or as business expenses pursuant to § 4 EStG. As a general rule, the deduction took the shape of a flat rate per working day and kilometre travelled to the amount of EUR 0.30 immediately before its abolition (mileage allowance, commuter tax allowance); the allowance was independent of the cost actually incurred. With effect from 2007, the legislature provided in § 9.2 sentences 1 and 2 EStG (and correspondingly in § 4.5a EStG) that the expenses incurred for travelling to one's regular workplace are no income-related expenses (sentence 1), but that "to cover increased expenditure", a flat rate of EUR 0.30 was to be allowed "like work-related expenses" for journeys from the 21st kilometre travelled (sentence 2). In the legislative procedure, the fact that the amendment of sentence 1 was tantamount to the introduction of what is known as the "factory gate principle" was justified by putting forward the objective of a necessary consolidation of the excessively indebted state budget (through expected increases in revenue of approximately EUR 2.53 billion); the remaining deductibility of longer distances travelled was justified by referring to it as a complementary hardship arrangement.

As regards the submissions made by the Finance Courts (Finanzgerichte) of Lower Saxony and the Saarland and by the Federal Finance Court (Bundesfinanzhof), the Second Senate of the Federal Constitutional Court ruled that for lack of a reasoning which is viable under constitutional law, these amended statutory regulations are not compatible with the requirements placed by the general principle of equality under Article 3.1 of the Basic Law (Grundgesetz - GG) on a consistent structure of decisions that concern income tax burdens, and that they are hence unconstitutional. Accordingly, the legislature is obliged to retroactively eliminate the unconstitutionality from 1 January 2007 by reorganising the legal situation. Until a new statutory regulation is adopted, the flat rate under § 9.2 sentence 2 of the EStG is to be applied - provisionally - without restricting its application to the 21st kilometre and above of distances travelled.

The decision is essentially based on the following considerations:

1. When determining income tax, the legislature is required by the Basic Law's general principle of equality to lend its decisions concerning income tax burdens a sufficiently consistent structure which is orientated towards the taxpayer's ability to pay. According to the valid income tax law, the taxpayer's ability to pay is determined, in principle, according to his or her annual net income, i.e. according to the amount of income less expenses accruing as work-related expenses or business expenses (this is known as the objective net principle), and less further expenses accruing for private reasons, in particular less the expenses for the taxpayer's minimum income, and that of his or her family members entitled to maintenance (this is known as the subjective net principle). What is decisive for the tax-reducing deductibility of expenses is therefore in principle the respective context in which they accrue.

The introduction of the "factory gate principle", which stipulates that what is decisive for the deductibility or non-deductibility of expenses are not the work-related or private reasons for which they accrue but exclusively the spatial distance of a journey to the workplace that causes costs, constitutes a singular exception within the valid income tax law. It is to be examined against the standard of whether the structure of a measure of taxation is consistent, and whether it is orientated towards the principle of ability to pay. The requirement of a consistent structure of decisions that concern income tax burdens demands that exceptions from the principles that govern the valid non-constitutional law be sufficiently substantiated. According to the Federal Constitutional Court's established case-law, such sufficient reasons are non-fiscal objectives of promotion and control and requirements in connection with the necessity of defining typical facts and with the purpose of simplification; this, however, does not include the purely fiscal objective of increasing state revenue. This line of argument is upheld by the Second Senate in the case at hand.

Accordingly, the new statutory regulation lacks a sufficient factual substantiation of its departing from the principle of the reason for the accrual of expenses when the basis of assessment is delimited under income tax law (2.). The legislature is also not released from the requirements placed on consistency under income-tax law in view of the possibilities of introducing a "change of system" that is in conformity with the constitution or in view of the possibilities of a new "assignment decision" (3.).

2. In spite of its urgency also under constitutional law, the objective of budget consolidation, which was almost the only argument advanced in the legislative procedure, cannot by itself justify the new statutory regulation because what the delimitation of the tax assessment basis is about is the equitable distribution of tax burdens. The increase of state revenue cannot, however, provide a standard for this because any increase of the tax burden, even an arbitrary one, will serve this objective.

Pursuant to the Federal Constitutional Court's case-law, objectives of promotion and control are only suitable as a reason for justifying a tax burden if they are motivated by recognisable decisions to this effect taken by the legislature. It is true that an abolition of the "commuter tax allowance" is demanded by renowned economists and specialists in public-sector economics in the interest of providing the taxpayers with tax incentives for a behaviour which is efficient for the economy as a whole. According to the reference materials submitted in the legislative procedure, the legislature has, however, not made this objective its own at any time, so that such a justification is ruled out for this reason already.

Also purposes of defining typical facts and of simplification do not provide a viable justification. Admittedly, it is constitutionally unobjectionable that the legislature proceeded on the assumption that the travel expenses in question accrue for "mixed" reasons, i.e. for reasons that are private as well as work-related, and that considerable latitude exists for defining typical facts and for simplification in the interest of the adequate assessment and classification of such expenses under income-tax law. The new statutory regulation, however, is not an assessment and classification, for which typical facts are defined, of the different weight of the private and the work-related components which give rise to the expenses; instead, it is a delimitation of constituent elements which is orientated exclusively, and in a purely quantitative manner, towards the desired result, i.e. towards an increased tax revenue. As the amount of the general wage or salary earner's standard allowance has not been harmonised correspondingly, the additional burden caused by travel expenses for distances of up to 20 kilometres cannot be "defined away" by making reference to this general standard allowance.

3. Finally, what is also lacking is a fundamental system change or a decision concerning a new assignment, which would "release" the legislature. It is true that constitutionally, the latitude which is due to the legislature when drafting tax law also comprises the authorisation to introduce new rules without being bound by principles of consistency to previous fundamental decisions. A permissible system change, however, cannot be implemented without a minimum orientation towards a new system. If this were otherwise, each and every statutory exemption could be declared (the beginning of) a new concept. The new provisions concerning the spatial delimitation of deductible travel expenses do not show an orientation towards a new fundamental concept, which might, for instance, be realised step by step. The general exclusion of travel expenses from the element of work-related expenses while providing that the costs for distances from 21 kilometres onwards be treated "like" work-related expenses and assessing a mileage allowance for it which is unrelated to expenditure actually incurred is characterised by a contradictory connection and interlinking of different regulatory contents and objectives and is not based on a comprehensive concept: In particular, virtually upholding the previous legal situation for distances of 21 kilometres and above cannot be justified as a hardship arrangement for lack of plausible hardship criteria, and, as was the case for the previous unrestricted mileage allowance as well, the flat rate which is independent of expenditure actually incurred has the effect of a subsidy of transport policy and environmental policy objectives in cases in which a low expenditure, or none at all, is incurred because cost-free or low-cost possibilities of transport are available. Using the flat rate as a hardship arrangement is, however, opposed to these objectives because it rewards in particular the choice and upholding of longer travelling distances, and thus a decision in favour of a behaviour which is less desirable under transport policy and environmental policy aspects, whereas the decision in favour of living near one's "factory gate" results in disadvantages which are contrary to these objectives.