Merkel's center-right party faces a tough battle to extend its 10-year hold on Lower Saxony state, a northwestern region of 8 million people, in the Jan. 20 election there. Polls suggest the center-left opposition has a good chance of winning, which would give it a significant boost ahead of September national elections in which Merkel will seek a third term.
Merkel made clear that her Christian Democrats will make "economic competence, together with jobs - and jobs that are well-qualified and fairly paid," along with economic strength, a keystone of this year's campaigns. She identified opposition plans for tax increases as one battleground.
"We believe that we do, of course, need income for the state, so we are not talking about tax cuts at this point," Merkel said at a televised news conference after her party's leadership met in Wilhelmshaven, a port city in Lower Saxony.
"But we believe that tax increases ... are not good for current economic developments, for medium-sized companies in particular but also for big companies," she added.
The number of Germans out of work averaged just under 2.9 million last year, the lowest since 1991. Germany's jobless rate of less than 7 percent contrasts with figures well over 20 percent in troubled eurozone partners Greece and Spain.
The strong German economy, and Merkel's hard-nosed management of Europe's debt crisis, have helped keep her popularity high and her party ahead in polls.
But the weakness of the pro-market Free Democratic Party, her junior coalition partner, means that her center-right alliance lacks a majority in surveys. The party, which campaigned at Germany's last election for tax cuts that it failed to obtain, has taken much of the blame for frequent coalition squabbling.
In Lower Saxony, polls show the FDP short of the 5 percent support needed to stay in the state legislature, which endangers popular conservative governor David McAllister's chances of keeping his job.
However, Merkel said she is "very optimistic that the (Free Democrats) will, on their own strength, with their ideas and their share in the success of the work of both the Lower Saxony state government and the federal government, be able to convince people."
The Lower Saxony election follows a rough start for Merkel's center-left challenger in the national elections, former Finance Minister Peer Steinbrueck.
He drew criticism this week for saying the chancellor earns too little and that Merkel has an advantage because she's a woman - adding to earlier controversy over his high earnings from public speaking. Merkel coolly dismissed a question about her challenger's performance.
"To be honest, I take care of my own performance and I'm very satisfied with that," she said. "The rest is for others to comment on."
(Copyright 2013 by The Associated Press. All Rights Reserved.)