German Chancellor Angela Merkel faces a battle to convince members of her own party in several federal states to back her plans for tax cuts before a vote in the upper house of parliament next Friday. Some conservative state premiers have threatened to veto the new law as they are worried about the losses in tax revenues. What is the row about? Merkel's new coalition with the pro-business Free Democrats (FDP) wants to cut the tax burden on families, hotels and businesses by 8.5 billion euros from next year. Germany's 16 federal states stand to lose 2.3 billion euros. The northern state of Schlewsig-Holstein says it will be hit especially hard. What is at stake? Schlewsig-Holstein, ruled by Merkel's conservatives and the FDP, and some other states, have threatened to block the legislation when it goes to the Bundesrat upper house on Friday. A veto would be a major political blow to Merkel less than two months after she started her second term and would undermine her authority, not least in her own conservative camp. It would sour ties between her conservatives and the FDP in the federal coalition and force a rethink of the tax plans. If Merkel makes concessions to Schleswig-Holstein, other states may demand equal treatment which could embolden other state premiers to make demands in future. How many votes does she need? Merkel's conservatives and the FDP have such a slim majority in the Bundesrat upper house that they need the support of all seven states ruled by their coalition. That would give them 37 of the 69 votes. States including Saxony have also voiced opposition to the tax plans and others, such as Lower Saxony, have said they will block the law if Merkel makes a separate deal with Schleswig-Holstein. What happens when? On Sunday, Merkel meets vice chancellor and FDP leader Guido Westerwelle along with leading rebel Peter Harry Carstensen, the conservative premier of Schleswig-Holstein, to overcome the differences. If they reach a deal, the response of other states will be crucial. If they don't, talks are likely to continue next week. The crunch Bundesrat vote is on Friday. What is likely outcome? There is a distinct possibility Merkel could lose the vote but she will probably do all she can to avert an embarrassment. Concessions could include boosting spending on education to relieve the burden on federal states – they account for about half of overall education expenditure. Other possibilities include a redistribution of the revenues from sales tax to benefit the federal states, easing the conditions for states to claim aid for building projects from the government's stimulus program, and boosting help for interest payments for some of the financially weaker states.
