The Road to Reform Is Rough, Fox Finds

Thirteen months after he took office with promises to modernize Mexico, President Vicente Fox greets the new year with a much meeker version of the radical fiscal reform he once sought.

Mexico badly needs to plug the holes in a feeble tax-collection system that has left the country heavily dependent on oil exports, a volatile source of income, analysts say. The nation boasts the second-largest economy in Latin America but has one of the worst tax-collection rates in the region.

Fox’s bold remedy, which relied on taxing food, medicine and books, apparently proved too politically unpalatable for lawmakers to swallow. Instead, Congress this week approved a watered-down version of the plan that will raise about half the money Fox had sought.

“Ultimately, I don’t even think you can call this fiscal reform,” said Denise Dresser, a senior fellow at the Pacific Council on International Policy in Los Angeles. “It’s certainly not a victory for the Fox administration in any sense.”

The fate of the financial package highlights the difficulties Fox faces as he tries to hoist Mexico out of the ranks of poor countries. The former Coca-Cola executive, whose election ended 71 years of authoritarian rule under the Institutional Revolutionary Party, or PRI, had hoped that sweeping tax reforms would prompt a Standard & Poor’s upgrade of Mexican bonds, opening the spigot for more foreign investment.

Although the debt upgrade may yet happen, some observers say that Fox’s failure to win a broad tax reform reflects poorly on his ability to control the nation’s agenda.

“It shows that the president is very weak,” said Jose Antonio Crespo, a political science professor at the Center for Economic Research and Teaching in Mexico City. “He tried to publicly pressure the Congress, and he failed completely. Even though he is popular, he cannot achieve what he wants.”

Fox on Wednesday praised the limited tax increases as vital steps toward steadying the national economy even as he lamented that they don’t go further.

“This does not satisfy the requirements for a modern reform of the Mexican economy,” Fox said. “However, it lets us visualize some progress in the year 2002. . . . As I said when this government took office, the executive proposes and the legislature decides. Such is democracy.”

One of the highest-profile efforts of his administration, Fox’s fiscal reform plan sparked controversy as soon as he unveiled it in April. Opponents charged that raising taxes on basic necessities would devastate poor families, who spend up to half their incomes on food. Even members of Fox’s own National Action Party voiced doubts.

Fox’s original reform plan aimed to raise 120 billion pesos, or about $13.2 billion. No party claims a working majority in Congress, and the centrist PRI and the center-left Democratic Revolution Party pounced on the unpopular tax proposal to win support in several local elections. By the fall, with a shrinking economy pinched by falling oil prices and the U.S. recession, the three major parties were leaning toward a tax package that would inflict less pain on their constituents.

After months of debate, Congress agreed on a budget that whittled expected revenue from new taxes to about 60 billion pesos, or $6.6 billion. The plan boosts taxes on soft drinks, cigarettes, alcohol, cellular phone use and luxury goods such as smoked salmon and fur coats.

“The tax increase does put Mexico’s budget on a somewhat sounder footing,” said Michael Gavin, executive director of emerging markets research at UBS Warburg in Stamford, Conn. “But it certainly seems to be a missed opportunity.”

Graciana del Castillo, Standard & Poor’s director of Latin American sovereign ratings, said it could take at least a week to analyze the measure and decide whether Mexico merits an investment-grade rating.

“We’ve been saying we want to see an improvement in public finances to make the government less dependent on oil and to increase the amount of total tax revenue,” she said. “Obviously, this tax reform will have an impact.”

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Rafael Aguirre in The Times’ Mexico City Bureau contributed to this report.