States mutiny against Merkel's tax cut bill

The January 2010 tax cuts planned by Chancellor Angela Merkel's new centre-right coalition faced failure on Friday amid growing resistance from Germany's states. Politicians are now discussing the possibility of pushing the changes back to 2011.

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Merkel’s conservative Christian Democrats (CDU) and their junior coalition partners the pro-business Free Democrats (FDP) want to adopt a fiscal package worth €8.5 billion including tax cuts and benefits aimed at spurring economic growth. Details include increased child benefits, reduced value-added tax (VAT) in hotels and restaurants, and a reform of business inheritance laws and some cuts in corporate taxes.

But officials from Germany’s 16 federal states – even those led by CDU-FDP coalitions – are increasingly dissatisfied with the package. Their balking threatens to torpedo the vote in the upper house of parliament, the Bundesrat, on December 18.

In a meeting with Merkel on Thursday evening there was talk of extending talks into early next year, which would mean the bill could not take effect on January 1 as planned.

Of the €8.5 billion in tax revenue Germany would miss out on due to the bill, the federal government would shoulder €4.63 billion, the states €2.28 billion and municipalities €1.57 billion.

“We don’t want to be forced by the federal government into taking on debt,” head of the CDU in the state of Saxony Steffen Flath told regional daily Sächsische Zeitung.

But North Rhine-Westphalia’s state premier and CDU member Jürgen Rüttgers told broadcaster WDR5 that the financial burden would be manageable.

Municipal authorities have argued that they are already heavily in debt and would not be able to survive additional pressure.

The plan to reduce VAT for hotels – added to the bill under pressure from the state of Bavaria – is particularly unpopular. It would mean a loss of €1 billion in tax revenues.

Meanwhile economists have also expressed doubts over whether the fiscal package will create economic growth.

Bundesbank board member Thilo Sarrazin told financial daily Handelsblatt on Friday that Merkel should lock herself in a room for two days and think over the issue.

“I am missing any toehold with which we are supposed to approach the problems that really threaten our future,” he told the paper.