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Author: Subject: Mexico's soft-drink tax proposal fizzles
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[*] posted on 1-3-2007 at 12:32 AM
Mexico's soft-drink tax proposal fizzles

http://www.latimes.com/business/taxes/la-fi-mextax23dec23,1,...

Lawmakers drop the unpopular plan and instead will dip into oil revenue for funding.

By Marla Dickerson
December 23, 2006

MEXICO CITY — Mexican legislators have canned a controversial proposal to impose a tax on soft drinks, opting to siphon oil revenue from a rainy day account to finance spending in the 2007 budget.

Bowing to intense pressure from the nation's soda manufactures, lawmakers this week rejected a proposal by President Felipe Calderon to impose a 5% tax on carbonated beverages, which would have raised about $286 million. Instead they returned to a familiar well. Lawmakers will dip into the nation's oil stabilization fund — Mexico's emergency piggy bank — to finance $1.8 billion worth of infrastructure projects next year.

"Everybody wants to play Santa Claus," political analyst Sergio Sarmiento said Thursday in a newspaper column about legislators' long-standing unwillingness to strengthen Mexico's precarious finances.

The tax was clearly unpopular in this cola-addicted nation, where people each guzzle an average of 40 gallons of soda a year. The proposed tax was to have been levied on bottlers.

But manufacturers threatened to pass the added expense on to consumers, who already pay a 15% value-added tax on soda at the cash register. Consumption taxes are regressive, hitting low-income people harder than rich ones. The poor in Mexico already spend more on soft drinks than beans.

Still, it was one of the few proposals aimed at tapping new sources of revenue in a nation hooked on petrodollars.

Congress' rejection of the tax was a setback for Calderon, who took office Dec. 1 and has made boosting nonoil tax receipts a priority of his administration. Mexico for years has relied on oil revenue to finance more than a third of its federal budget, a risky strategy given that oil is a finite resource whose price fluctuates.

Government figures show that the nation's 2005 nonoil tax receipts equaled about 9.7% of its gross domestic product. That's a collection rate lower than that of Bangladesh. Mexico's schools, roads and hospitals are in desperate need of funds. Tax evasion is rampant.

But widespread theft by public servants has sapped Mexicans' willingness to pay. Oil wealth has removed the urgency to crack down on tax cheats, diversify Mexico's tax base and earmark oil earnings exclusively for long-term development projects rather than short-term uses.

Now, production at the nation's principal oil field is declining, and petroleum prices are down from summer's lofty levels. Calderon's economic advisors have warned of lean times ahead.

Legislators eager to break for Christmas were unable to muster the will to levy a tax that would have funded less than 0.1% of the federal budget. But some vowed that they would return from the holidays ready to shore up Mexico's shaky finances.

"We recognize that we are in a very precarious fiscal structure," said Sen. Gustavo Enrique Madero Munoz, president of the Senate's treasury and public credit committee and a member of Calderon's National Action Party. "There is a public recognition and a [political] commitment" to do something.

Others believe that only a collapse in oil production will motivate Mexico's lawmakers to act.

Among the few revenue items approved this week was a tax increase on cigarettes to 140% next year from 110% currently. The 2007 budget also shrinks some loopholes for filers, reducing the amount that executives can deduct for vehicles and lunches.



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