Volume 6, Number 1, Page 3

Mexican Budget Dispute Resolved

By José Felipe García

After several months of debate, the Mexican House (Cámara de Diputados) approved the federal fiscal budget for 1999. The budget was passed last Thursday, just hours before the end of the year.

For decades one of the most important sources of Mexican’s government revenue has been crude oil exports. For several years, crude oil prices have been dropping, as has the tax revenue of the federal government. After several attempts to raise oil prices, including several meetings between the Ministers of Energy of Mexico, Venezuela and Saudi Arabia, the Mexican federal government proposed several tax increases in order to compensate for its loss of revenue.

Among the changes proposed by the government for increasing revenue during 1999 were the following:

• The establishment a 15 percent tax on telephone services
• The reduction of tax evasion
• The Reduction of corporate income tax from 34 percent to 30 percent if revenue is reinvested
• Increased income taxes for those who earn more than $1.5 million pesos a year
• Allowing states to apply a sales tax of up to 2 percent

The announcement of the above proposals by the government caused varied reactions in the Mexican public and private sectors. The telephone tax was widely criticized and the governors of several Mexican states quickly stated that, even if approved, they will reject the 2 percent sales tax. The House rejected the 15 percent tax on telephone services as well as other tax increases.

In order to compensate for decreased revenue, the house approved increasing several taxes. The income tax for those who earn above $1.5 million pesos a year (about US$ 150,000) will be raised to 37.5 percent instead of the 35 percent previously established in the income tax law. Those who have an income above $2 million pesos a year (about US$ 200,000) will pay a 40 percent income tax, instead of the previous 37 percent tax.

The House also requested that the Executive branch “establish tariffs on the exports of countries with which Mexico has no free trade agreements.” For such reasons, the Department of Commerce and Industrial Development (SECOFI) decided to temporarily increase some import tariffs. The increase in tariffs set by SECOFI fully complies with all international agreements Mexico has signed, including those with member countries of the World Trade Organization and the eight countries with which Mexico has established free trade agreements.

Not only were income taxes increased, expenditures were also reduced. While the government of Mexico City requested a 1999 budget of $7 billion pesos, the House approved only $1.7 billion pesos. Other entities who saw their budget significantly reduced include the Mexican Institute of Social Services, the Federal Company of Electricity and Pemex. n

Lic. Jose Felipe Garcia is an attorney with the National Law Center for Inter-American Free Trade