VAT homologation in border zones: a lost battle?

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On October 18, the Chamber of Deputies approved the 2014 Income Law and sent it to Senate for discussion. Deputies forecasted a collection of 4.5 trillion pesos, only 10 billion (0.2%) less than the Executive’s original proposal. In the end, it was decided that unpopular measures such as VAT for school fees and mortgages would be left out; however, most of the proposal’s points remained. Among those taxes is the VAT homologation in border zones. Given the ensuing controversy generated by such a measure, it is worth asking over its eventual implications and the possibility of its reversion while being discussed in the Senate.
Differentiated VAT (currently 11% and applied in both states of the Baja California peninsula, Quintana Roo as well as some areas in Chiapas, Chihuahua, Tamaulipas, Nuevo León, Sonora and Coahuila) has been sustained under the justification of boosting competitiveness  in the region compared to their neighboring countries. In that sense, differentiated VAT has complied with the goal of favoring trade in the region and the attracting investments. In fact, some municipal councilors and legislators have demanded an expansion of the aforementioned tax to benefit other nearby zones. Nevertheless, differentiated VAT has sustained competitiveness through artificial manners, which is now threatened with homologation. Its increase will include an economic readjustment, which will very likely be attacked through cuts in order to adjust spending. In addition to homologation, the new 16% VAT to temporary imports for manufacturing, maquiladora and export companies is another measure – less discussed – that will also influence the loss of competitiveness by hindering capital flow. This tax will affect all the export industry throughout the country, but especially border zones due to the relevance of trade within the region.
The budget approval still needs the support of Senators. In that regard, PAN members have voiced their absolute opposition to homologation and have announced their intention to reverse it. If we consider that PRI usually votes as a single block and an important sector within PRD has shown willingness towards the increase, the realistic chances of preventing the proposal are not high. Its reversion would depend of obtaining an alliance with PRD forces at the Senate. Any other way, PAN’s position would have as its sole objective the rise of political costs for parties that have agreed upon this tax raise. Perhaps the only thing that PAN intends (especially thinking about voters from the northern part of Mexico) may be to establish their opposition stance – in those sporadic attempts to regain its identity.
VAT homologation may be linked with other issues that will be discussed on Congress such as legislative reelection. It is worth asking how many of the current legislators coming from the border zone would have thought twice before voting in favor of such an unpopular measure if their reelection were at stake. Nowadays, the lack of accountability towards their voters favors that there are less obstacles for voting against the interests of those who put them in power. Lastly, it is important to highlight that if the reform’s goal was just to obtain an increase in tax collection (as it is apparently the case) a more ambitious measure would have consisted on implementing integral measures whose purpose would consist in increasing the tax base, and not in concrete actions that, although they will increase income (to a historical maximum), it will be at the cost of competitiveness.
The latter point is crucial: the problem with the Income Law does not have to do with the specific measures that it embodies, including unpopular and controversial issues (such as those dealing with sodas, junk food or fiscal consolidation), but due to the absence of an integral tax strategy that, for having that trait, were to be more defensible. Though it is called “tax reform”, it ended up being nothing more than another miscellaneous fiscal resolution from plenty that have been presented throughout the years. Perhaps that is not the battle where the former Presidential candidate would want to focus on, but it is certainly part of her strategy. Rebuilding a political career is not easy but it is also not impossible. Nowadays, Josefina is not contending for the Presidency, though she’s pursuing a position where she would like to conduct her own party (or let it be said, herself once again) towards that goal. The country’s conditions are certainly not the best and troubled waters lie ahead. We’ll see in what way Vázquez Mota will take advantage of circumstances as to (re)build her political persona. Maybe her greatest obstacle lies less in the aforementioned issues and more in the fact that, due to a schedule change in PAN timetables, the future party leadership will only last for 18 months, a very short period to achieve anything.


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