Sigmar Gabriel, the German Economy Minister, could see his proposed tax breaks for energy conservation improvements to buildings quashed by his cabinet colleague’s strict budget plans.
Finance Minister Wolfgang Schäuble is not prepared to countenance the loss in tax revenue, government sources told Handelsblatt. Although the two are due to discuss the move today, chances for a deal are slim.
The tax breaks for building renovations are a core part of Mr. Gabriel’s proposed National Action Plan for Energy Efficiency, which he hoped Chancellor Angela Merkel’s cabinet would approve in early December. The economy minister, who is also German vice chancellor, has repeatedly stressed the importance of the tax write-offs in recent weeks.
The German government is having difficulty meeting its own target to reduce greenhouse gas emissions by 40 percent compared to 1990 levels by 2020. Environment Minister Barbara Hendricks proposed shutting down older coal-fired power plants to help meet the goal, but that is something Mr. Gabriel has rejected. Instead, he wants to increase the energy efficiency of Germany’s housing stock, which would dramatically cut power usage and help the country hit its 40-percent emissions reduction.
Chancellor Merkel could end up having the final say on the matter. Her government failed to push through tax breaks for energy conservation renovations amid resistance from Germany’s 16 federal states during the last parliamentary session. The chancellor pointedly expressed her regret at the time.
Should the measure fail again due to Mr. Schäuble’s opposition, it could rile Ms. Merkel’s coalition of her conservative Christian Democrats and Mr. Gabriel’s center-left Social Democrats.
Mr. Gabriel wants a 15 to 20 percent tax write-off over ten years for renovations to improve energy conservation. An estimated 40 percent of all energy use in Germany is taken up by heating and warm water for buildings. The vast majority of the country’s housing stock has yet to be renovated.
The proposed tax breaks have been welcomed by builders and the insulation industry, which both stand to gain business from the move.
Should the measure fail due to Mr. Schäuble’s opposition, it could rile Ms. Merkel’s coalition government.
“Tax incentives for energy renovations are one of our best weapons against wasting energy in the proposed efficiency program. If we hesitate and dither here, we’ll lose a lot of trust,” Martin Bornholdt, chairman of an industry group for energy efficiency said.
But as much as those set to benefit from the tax breaks support them, there is equally vigorous opposition from advocates for budgetary discipline.
“There’s an enormous windfall effect,” Clemens Fuest from the ZEW Center for European Economic Research said.
Anyone replacing the heating system of their house would receive the tax break. Mr. Fuest said the government could better reduce greenhouse gas emissions with a carbon tax increasing the cost of heating, as it would induce greater energy conservation.
“The saving potential in the housing sector is generally overestimated,” the economist said.
Even the housing industry is cautious about the proposed tax breaks.
“Renovations for energy efficiency are good, but the government is trying to push it to a level that we can’t always afford,” warned Axel Gedaschko, president of the GdW property industry association.
He said the focus should instead be on measures that “have the greatest use and cost the least.” For example, excessive insulation of buildings can be prohibitively expensive, he added.
Mr. Schäuble can also count on the support of Germany’s 16 federal states. During the past legislative period, advocates for tax breaks had nearly pushed them through. But at the last minute, the states were able to get the upper house of parliament, the Bundesrat, to scrap them.
The states want to avoid losing tax revenue at all costs because they face a legal requirement to balance their budgets starting in 2020. They fear the cost of the tax breaks could end up being much higher than expected, should legions of homeowners decide to insulate their houses.
In order to avoid defeat in the Bundesrat this time, Mr. Gabriel reportedly wants to assure the states that the federal government will make up any lost tax revenues. That, however, would complicate his negotiations with Mr. Schäuble, who desperately wants to present Germany’s first balanced budget in decades next year.