Mexican Congress passes diluted government tax reform

Miguel Gutierrez, Michael O'Boyle and Dave Graham
A woman buys chocolate from a store in Polanco neighborhood in Mexico City October 29, 2013. REUTERS/Edgard Garrido

By Miguel Gutierrez, Michael O'Boyle and Dave Graham

MEXICO CITY (Reuters) - Mexico's Congress on Thursday approved a government-backed bill to increase weak tax revenues but watered down the measure that is expected to have only a moderate effect on the tax take.

The legislation, which includes higher taxes on the wealthy and levies on junk food and stock market gains, is a key plank of an economic program spanning energy to telecoms that aims to ramp up growth in Latin America's No. 2 economy.

The ruling Institutional Revolutionary Party (PRI) pushed the bill through with leftist lawmakers, making final tweaks to slightly weaken a proposal to increase income tax rates.

Conservatives said the bill was a menace to the stumbling economy and walked out of the Senate in protest when their attempts to change the plan were ignored by the PRI.

Lawmakers in the lower house of Congress gave final approval to the tax bill, and President Enrique Pena Nieto is expected to sign the measures into law.

Analysts viewed the Senate's weakening of the tax reform as a minor issue, and said it was unlikely to hurt Mexican assets like the peso currency and bonds.

"The poison is already in the price," said Siobhan Morden, a Latin American strategist at Jefferies LLC in New York. Markets had been disappointed at the reform's original scope.

Political spats over the tax plan could complicate efforts to pass reforms of the telecommunications and oil industries.

The PRI lacks a majority in Congress and is banking on help from the conservative National Action Party (PAN) to carry out Pena Nieto's energy reform, which aims to lure investment into the state-controlled sector and reverse a slide in oil output.

The leftist Party of the Democratic Revolution (PRD), which gave the PRI enough votes to pass the fiscal reform, opposes breaking the grip of state oil monopoly Pemex on the industry.

In the Senate, PRD and PRI lawmakers agreed to keep the income tax rate for those earning between 500,000 pesos and 750,000 pesos at 30 percent, not 31 percent as had been proposed. Higher rates will kick in above 750,000 pesos.

Lawmakers also increased the percentage of workers' benefits that companies can deduct from their total tax bill. Separately, the Senate voted to raise a planned levy on high-calorie foods including chocolate from 5 percent to 8 percent.

The changes made by Congress on Thursday mean the bill will likely generate less revenues than the government had originally been forecasting.

Before the Senate changes, it was expected to yield added tax income worth 2.7 percent of economic output by 2018.

"Without a doubt it's a decrease in revenues that will mean a decrease in spending," said PRD Senator Armando Rios Piter, who negotiated changes to the bill with the PRI.

Mexico has the lowest tax revenue in the 34-nation Organisation for Economic Co-operation and Development (OECD), crimping its ability to spend on health, infrastructure and social programs vital to boosting living standards and growth.

The total Mexican tax take was less than 19 percent of gross domestic product in 2010, compared with nearly 26 percent for Turkey, around 31 percent in Greece and 36 percent in Germany, according to OECD figures.

(Additional reporting by Alexandra Alper; Editing by Simon Gardner and Xavier Briand)