Political Heat Cools Enthusiasm for Fox’s Tax Reforms

President Vicente Fox already is facing so much opposition, even from within his own party, to a key provision of his new tax-reform proposal that he may be forced to scale back or eliminate that provision.

The heated debate over tax reform--a critical element of Fox’s efforts to modernize Mexican society--illustrates the challenges facing Mexico’s new leader as he pushes widespread reforms. Fox probably will be forced to make huge trade-offs and compromises in the package.

Less than one day after the package formally was unveiled, broad-based resistance quickly arose Wednesday in Mexico’s Chamber of Deputies to a provision calling for the 15% value-added tax to be extended to food. Taxes on food and drugs are the single biggest source of new tax revenues targeted by Fox, who hopes to boost annual tax collections by up to $20 billion, or one-third more, excluding oil revenues.

Opponents said his package unfairly imposes immediate and painful cost-of-living increases on the poor, who spend up to half of their family incomes on food. Although the Fox administration said it would reimburse the food tax to Mexico’s poorest 5 million families, critics said there is no way to efficiently distribute it.

The Fox team expected intense political heat, given the amount and kinds of new tax revenues the reform package is targeting. In recent days Fox has said repeatedly that overhaul is essential if his vision for a more efficient economy and government is to be realized.

But Fox may have been surprised by the vehement opposition to provisions that would impose new taxes on private school tuition, books and transportation, in addition to food and drugs. Alarmists predicted the reform package would promote Mexico’s black market, depress consumption and even cause a dumbing down of Mexican schoolchildren.

In its original form, the tax-reform package stands a poor chance of gathering support among a coalition of deputies from Fox’s National Action Party (PAN) and the Institutional Revolutionary Party (PRI) that would be required for its passage, political leaders said.

“We agree we have to increase the tax base but not at the cost of the poorest,” said Enrique de la Madrid, a PRI deputy. “Our main difference with the Fox plan is over food.”

Luis Pazos, a senior congressman and ranking PAN member on the influential budget and public accounts commission, acknowledged the reform’s political problem, saying: “We’re going to look for a way to leave at least basic foods outside the tax. The discussion will be over what is basic.”

Because of widespread tax evasion and an expanding informal economy, Mexico ranks near the bottom among Latin American nations in tax collections when figured as a percentage of the nation’s total economic output. Mexico’s 11% collection rate lags behind Latin America’s 18% and developed nations’ 25% or more. Tax reform perennially has been postponed, along with much-needed social projects.

Even analysts who disapprove of certain provisions praised the broad strokes of the Fox plan, saying Mexico needs sweeping fiscal reform for fiscal and political reasons. Economist Horacio Sobarzo of the Colegio de Mexico said the failure of tax reform, on which Fox has pegged much of his prestige, would “be a sign that Fox isn’t capable of doing anything.”

Economist Isaac Katz of the Autonomous Technological Institute of Mexico said the package as presented would spur savings and ease credit.

“The states and municipalities are hoping it passes because it would mean more money for spending on housing, infrastructure and fighting poverty, things with a social benefit and in some cases an economic return,” said Mauricio Gonzalez, general director of the Economists Group & Associates.

But Rosalinda Lopez, a prominent deputy in the opposition Party of the Democratic Revolution, said Fox had reneged on his promise to make steep spending cuts in the federal bureaucracy and now was putting the burden of reform on the poor and middle class.