Oct. 30 (Bloomberg) -- German Chancellor Angela Merkel is facing growing resistance from state leaders of her Christian Democratic Union to the government’s plan to reduce taxes at the expense of federal and state coffers.

“I need leeway to act for my state budget,” Stanislaw Tillich, prime minister of the eastern state of Saxony, said after a meeting of regional leaders in the western city of Mainz today. “We need to find joint solutions with the federal government that safeguard state and municipal finances.”

Tillich’s Saxony-Anhalt counterpart Wolfgang Boehmer and Thuringia’s Christine Lieberknecht, also Christian Democrats from the east, have already said they can’t afford revenue losses that may force them to violate a constitutional rule that limits budget deficits.

Merkel has pledged tax cuts worth 24 billion euros ($35 billion) even as the budget deficit widens in a bid to shore up growth in Europe’s largest economy. Opposition from the states, which are represented in the upper house of parliament, comes less than a week after Merkel’s party unanimously backed the tax cuts in a coalition agreement with the Free Democrats.

Merkel needs the support of all state governments ruled by her bloc to pass laws that affect state finances in the upper house, the Bundesrat. Tillich said there’ll be “intensive negotiations in coming weeks and months” on “how and to what extent” the coalition’s pledge can be implemented.

Germany’s federal government, the states, cities and special funds will post a shortfall of around 133 billion euros next year, compared with 7.4 billion euros in 2008, medium-term budget plans show. Germany will violate an EU rule that limits the overall deficit to 3 percent of gross domestic product at least through 2012, the plan shows.

Merkel told a convention of her Christian Democratic Union on Oct. 26 that the coalition “decided to go down a road that relies fully on growth.” While there’s no guarantee that this strategy will work, Merkel said it will certainly fail “if all we do is save, save, save.”

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.

Last Updated: October 30, 2009 12:02 EDT