Handwerk Snubs Berlin as €1,000 Tax-Free Bonus Plan Collapses Over Cost Battle

Germany's ambitious plan to let employers pay workers a tax- and contribution-free bonus of up to €1,000 has been definitively killed. The Bundesrat, representing the Länder, rejected the measure in mid-May, setting off a bitter dispute over who should foot the bill for federal relief programs.

A survey of 767 craft businesses reveals how little the initiative resonated even before the parliamentary defeat. Sixty-three percent of respondents called the bonus the wrong tool; 54 percent had planned to pay nothing at all. Only 10 percent intended to give the full amount, and 4 percent a partial sum. Jörg Dittrich, president of the German Confederation of Skilled Trades, slammed the proposal as an attempt by the governing coalition to offload relief pressure onto companies. Instead of voluntary bonuses, 32 percent of firms called for across-the-board tax cuts, and 29 percent for lower non-wage labor costs. The construction sector described the bonus as “out of touch with reality.”

A costly veto

The Bundestag had approved the bonus on 24 April, allowing employers to voluntarily pay up to €1,000 tax-free and free of social contributions. The amounts would have been deductible as business expenses. The Union and SPD voted in favor; the Greens abstained; the AfD and Left Party voted against.

But on 13 May the Bundesrat blocked the law. The reason: an estimated €2.8 billion in lost tax revenue. Of that, €1.1 billion would have been borne by the federal government, with the rest falling on states and municipalities. On 21 May the Bundestag confirmed that the bonus had been struck from the bill.

Länder demand an 80-percent federal share

The failure has sparked a broader political fight over cost allocation. At the conference of state premiers on 25 June, the Länder agreed on a clear demand: for any new federal or EU law that imposes costs on states, Berlin should cover 80 percent of the burden — above a de minimis threshold of €125 million. A draft resolution from the same day stipulates that states and municipalities must be compensated for at least 75 percent of the cost of new benefit legislation, with compensation channeled through value-added tax points.

Merz pushes pension overhaul

Separately, Chancellor Merz announced in late June that the government would enact a pension reform this year. Controversial elements include raising the retirement age, introducing a capital-funded pension pillar, and potentially abolishing mini-jobs. The move could increase cost pressure on businesses and reignite debate over ancillary wage costs.

Saxony goes it alone

While the federal level is gridlocked, individual states are acting. Saxony’s state parliament approved a craft trade action plan. The centerpiece: a master-craftsperson bonus raised to €3,000, aimed at strengthening Saxony’s 54,000 craft enterprises.

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