German states could delay VAT hike approval

BERLIN, June 15 (Reuters) Resistance from German states to planned subsidy cuts threatens to delay parliamentary approval of a controversial rise in value-added tax that Chancellor Angela Merkel's government wants to consolidate the budget.

German Finance Minister Peer Steinbrueck has ploughed ahead with plans for a three-percentage point increase in VAT to take effect in January, winning the support of the lower house of parliament, despite fears the increase could crimp growth.

However, states led by Merkel's conservatives and the Social Democrat-led Rhineland-Palatinate, have baulked at accompanying measures to cut federal subsidies for local transport networks.

''Everything is open at this stage. The decision is on a knife edge,'' said Karsten Beneke, a junior minister for conservative-led North Rhine-Westphalia said on Thursday. He added that he was hopeful the subsidy dispute could be resolved.

The bill to increase VAT to 19 percent from 16 percent is at present due to go to a vote in the upper house of state representatives on Friday, but now runs the risk of being handed over to a mediation committee to discuss the subsidy cuts.

A delay in the bill's adoption could embolden critics of the tax increase, some of whom want it to be trimmed back to just two percentage points to lessen the risks of stamping out a budding consumer recovery.

The proposals made by Steinbrueck are a key plank in the coalition government's economic policy programme and amount to the biggest post-war tax increase in Germany.

Originally a conservative party campaign pledge, the VAT plan was adopted by the grand coalition with minor changes despite pre-election condemnation from the Social Democrats.

After just over six months in office, Merkel's government is being closely watched for signs of whether it is strong enough to push through much-needed reforms. The VAT increase, reform of the health insurance system and changes to the corporate tax regime are seen as the major tests.

The increase could cost taxpayers up to 18 billion euros annually. Merkel's government plans to use the funds to reduce the budget deficit and cut payroll costs to stimulate hiring.

Mass-circulation Bild newspaper, which has run a vehement campaign against the VAT hike, said Friday was the last chance to stop the value-added tax ''madness''.

States have railed against Berlin's already watered-down plans to slash 2.3 billion euros in local transport subsidies by 2009, fearing such a move would mean cuts to train services.

Steinbrueck needs a majority of votes from the 69 state representatives in the Bundesrat or Upper House for the bill to pass. However, a decision will first be taken whether to send the bill back to mediation to work on the subsidy cuts.

(Additional reporting by Gernot Heller) REUTERS DKS KP1912