Second Inflation Relief Package as a draft for review

The so-called "cold progression" is to be abolished with the second inflation relief package. Until now, the income tax was based only on the numerical value, not the actual monetary value, although with price increases a nominal increase in income does not correspond to the real increase in income. The effect of the cold progression has also been shown in the context of the progressive income tax rate that the key figures of the progressive tax rate were not adjusted to the rate of price increase.

The adjustment of the tax rate to inflation and, consequently, the elimination of the cold progression should not only include the limit amounts that are relevant for the application of the tax rates for income parts up to € 1 million, but also, for example, the single-earner deduction amount and the dependency allowance, the traffic allowance (including the increased traffic allowance and surcharge to the traffic allowance), the pension allowance, and the reimbursement of the single-earner and single-parent allowance. The inflation adjustment targets the corresponding contribution values, not the percentage values - for example, the contribution values for the various tax rates below the maximum tax rate are included in the inflation adjustment.

The scope and methodology of the inflation adjustment are to be regulated in a separate paragraph (§ 33a EStG). The cold progression is defined as an additional income tax that results from the fact that the tax rate is not adjusted for inflation when it is in effect. The additional income thus results from the difference between the total income tax revenue at a nominally unchanged tax rate and the total income tax revenue when inflation is adjusted. The inflation rate used for the inflation adjustment shall be based on the annual inflation rates of the consumer price index (VPI) published by Statistik Austria – they refer to the calendar months July of the previous calendar year up to May of the current calendar year, including preliminary values for June of the current calendar year. It is important to note that only a positive inflation rate is decisive; deflation (negative value) does not trigger an adjustment.

The inflation adjustment for each calendar year is designed in two complementary measures following the draft of the review – on the one hand in the form of automatic wage adjustment and on the other in the form of additional compensation. The automatic wage adjustment covers 2/3 of the determined inflation rate. For example, if the inflation rate for the period July 2023 to June 2024 is % 3.3, an automatic wage adjustment of 2.2 will be made for the calendar year 2025 %. The additional compensation (for inflation) is intended to be carried out individually based on scientifically grounded economic principles – in the form of (additional) legislation by the legislator. In this regard, measures such as reducing the tax rate, measures in the field of social insurance, the promotion of the mobility of employed individuals by public transport, or facilitating employment for socially disadvantaged groups of people should be taken into account. For the inflation adjustment for 2023, different regulations will apply, ensuring broad acceptance while also providing sufficient lead time, especially in payroll processing.

We will keep you updated on the further legislative process.

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