German states seek changes to the 2027 income tax reform

Germany's 16 state governments want parts of the federal government's income tax reform changed before it becomes law. In an opinion adopted on 16 October 2026, the Bundesrat – the chamber through which the states take part in federal legislation – proposed changes to the draft Income Tax Reform Act 2027 and criticised in particular the planned treatment of tax-free supplements for work on Sundays and public holidays.

The opinion is not a veto. It is the states' first formal opportunity to comment on a government bill, and their proposals now go to the federal government and the Bundestag. The states hold a stronger card later on: because they share the revenue from income tax, the reform cannot become law without the Bundesrat's consent.

What the states object to

To create targeted incentives to work, the bill would raise the maximum hourly wage on which tax-free Sunday and holiday supplements can be calculated from €50 to €75 from 1 January 2027, while the cap for night-work supplements would stay at €50. The Bundesrat proposes keeping the cap and instead moderately raising the supplement rates, currently 50% for Sunday work and 125% for work on public holidays. Otherwise, it argues, Sunday and holiday supplements would in future have to be calculated differently from night-work supplements, which would mean more bureaucracy. It adds that only higher earners would gain from the higher cap, since shift workers in care or in hotels and restaurants do not, as a rule, earn a basic hourly wage above €50.

The states welcomed another part of the bill: a new way of dividing trade tax (Gewerbesteuer), a local business tax whose revenue goes to the municipalities, for operators of data centres. Because data centres are highly automated, the towns where they stand often do not share in the tax revenue, the government says. In future, 90% of the trade tax assessment amount (Gewerbesteuermessbetrag) is to be divided among the municipalities according to the data centres' rated electrical connection capacity and only 10% according to wages. The states want to make sure the rule cannot be dodged, whether through international tax-avoidance schemes or by adding an insignificant secondary business to a data centre.

What the reform would change

To help pay for the relief, the 45% rate for the highest incomes, known as the Reichensteuer (literally ‘rich tax’), is to apply from a taxable income of €250,000, and a new rate of 47% from €280,000. The government puts the total relief at around €10 billion a year. It says a working family with two children and a combined taxable income of €60,000 could be more than €600 a year better off from 2028 than today.

Why the states have a stake

Income tax is a ‘joint tax’. Under Article 106 of the Basic Law, Germany's constitution, the federal government and the states share the revenue from income tax equally, after a share has gone to the municipalities. Article 105 says that federal laws on taxes whose revenue goes wholly or partly to the states or municipalities require the Bundesrat's consent, and the Bundesrat itself names income tax as an example. Decisions of the chamber need at least 35 of its 69 votes.

The states and their municipalities would also bear most of the lost revenue. According to the bill, the law as a whole would cut tax revenue by €4.515 billion in cash terms in 2027 and by €6.02 billion in 2028. The federal government's share of that is €1.91 billion and €2.504 billion respectively.

What happens next

The federal government can now reply to the states' proposals with a counter-statement, and the Bundestag continues its deliberations. Finance Minister Lars Klingbeil presented the bill to the Bundestag on 8 October 2026. He said he wanted parliament to debate and pass it quickly so that the relief could take effect on 1 January 2027, and that he was open to parliament creating more room for relief for small and middle incomes.

Once the Bundestag has passed the law, it returns to the Bundesrat for a final decision. The chamber's next plenary session is on 20 November 2026. Our explainer sets out how the Bundesrat works.