Mexican lawmakers seek tax plan changes, want 35 percent top rate

MEXICO CITY Thu Oct 17, 2013 6:51am BST

Mexico's new president Enrique Pena Nieto gestures after a speech at National Palace in Mexico City December 1, 2012. REUTERS/Edgard Garrido

Mexico's new president Enrique Pena Nieto gestures after a speech at National Palace in Mexico City December 1, 2012.

Credit: Reuters/Edgard Garrido

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MEXICO CITY (Reuters) - Mexican lawmakers proposed changes on Wednesday to President Enrique Pena Nieto's plan to boost the country's low tax receipts, urging higher rates for top earners.

Pena Nieto last month set out a series of measures to raise annual tax revenues by about $35 billion by 2018, but he is grappling with stiff political opposition and lobbying from business groups.

He floated the idea of raising income taxes for wealthier Mexicans and slapping a levy on stock market gains, a universal pension and unemployment insurance, along with emergency spending that would force a budget deficit this year and next.

The proposal is a key plank of a wider reform agenda that Pena Nieto hopes will boost growth in Latin America's No.2 economy, and also includes measures to tax soft drinks and impose a carbon charge on polluters.

"We have heard ... proposals from one extreme and the other, and our responsibility is in the middle," said Jorge Herrera, a lawmaker with the ruling Institutional Revolutionary Party (PRI).

"There are a great number of elements that have changed from the original initiative," he added.

Lower House lawmakers proposed raising the planned top rate on a sliding scale to 35 percent for those who earn more than 3 million pesos ($233,100) a year, above the 32 percent that Pena Nieto had put forward, according to the draft reform revision.

Those earning over 500,000 pesos a year would pay 31 percent, over 750,000 pesos would pay 32 percent, rising to 34 percent for those who earn over a million pesos a year.

The Lower House finance committee approved the amendments in a vote late on Wednesday, and the House is likely to back the bill on Thursday. It must then pass through the Senate, which is also likely to ratify it.

REVENUE SHORTFALL

The lawmakers also proposed keeping a government plan to raise sales taxes in border states, and called for a 5 percent tax on junk food.

The plan also foresees changing a carbon tax and mining levy. A tax of up to 3 percent of the price of fossil fuels would be applied, as well as a 7.5 percent tax on mining against which companies can deduct future exploration investments.

The Lower House lawmakers said they were against applying sale tax on rents, mortgages and property sales or on schooling costs, both items that ruling party deputies had said the government was willing to review after a backlash.

Lawmakers estimate the proposed changes will leave the government with a revenue shortfall of between 30 billion and 40 billion pesos. The government aims to make up some of the gap by raising its oil revenue forecast.

The conservative opposition National Action Party (PAN), seen as the PRI's most natural ally on economic reforms, is set to vote against the lower house committee's proposal.

"We cannot accompany a retrograde proposal to go back to imposing taxes on the same people as ever, and when .. they impose practically confiscatory income taxes," said Jorge Villalobos, deputy leader of the PAN in the Lower House said.

Pena Nieto attached the reform to the 2014 budget, which must be approved by mid-November, and the PRI needs to cut a deal to pass the bill because it does not have a majority in Congress.

Many economists and investors were disappointed that Pena Nieto did not seek a more comprehensive tax overhaul, and they said rising social security and pension costs would require further tax reform in the coming years.

He steered away from imposing a controversial sales tax on food and medicine as Mexico's economy slows and as he saves capital to push through an overhaul of the energy sector.

"The government defiantly faces challenges in the medium term," said Marco Oviedo, an economist at Barclay's Capital in Mexico City.

"The topic of public finances will remain pending, and they will have to address it later in Pena Nieto's term, or in the next administration."

If the efforts to push the fiscal reform plan through founder, it will curb the government's spending plans and could complicate other legislation, including a bill to open the country's state-run oil industry to private investment.

(With reporting by Dave Graham and Michael O'Boyle; Writing by Simon Gardner; Editing by Ken Wills, John Stonestreet)

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