VZCZCXRO8853
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2518/01 1372135
ZNR UUUUU ZZH
P 172135Z MAY 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7015
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 MEXICO 002518 
 
SIPDIS 
 
SIPDIS 
SIPRNET 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD 
NSC FOR DAN TOMLINSON, RICHARD MILES 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: MEXICO'S GOVERNMENT BUILDING SUPPORT FOR FISCAL 
 
REFORM 
 
------- 
Summary 
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¶1. (SBU) President Calderon and members of his administration 
have been working with Congress to build support for fiscal 
reform.  The government would like for the reform to be 
approved during a special session of Congress this summer so 
the new measures can be incorporated into the President's 
2008 federal budget proposal, which is due to the Chamber of 
Deputies on September 8.  To secure the initiative's passage 
in Congress, the government will need support from the 
Institutional Revolutionary Party (PRI) -- which, among other 
things, is pushing for more resources for the states and 
refusing to levy the value-added tax food and medicine.  The 
debate over fiscal reform is currently in a holding pattern 
because of the close PAN-PRI election in Yucatan on May 20. 
Several contacts have told econoff that the PAN should be 
able to count on PRI support for fiscal reform if the PRI 
candidate wins the race, but not necessarily if she loses. 
The government has not disclosed the specifics of its reform 
proposal but says it wants to simplify the tax system, reduce 
administrative costs, make the tax system more transparent 
and equitable, and increase tax collection by 2-3% of GDP in 
the coming years.  Some observers have said that fiscal 
reform will be more difficult to pass than pension or energy 
reform, and have opined that the final reform may not be as 
comprehensive as it should be.  End Summary. 
 
------------------------------- 
The Importance of Fiscal Reform 
------------------------------- 
 
¶2. (SBU) For many, Mexico's most pressing public policy 
problem is that the government relies on oil-related revenues 
to finance 38% of its spending, and that states and 
municipalities depend on transfers from the federal 
government for more than 90% of their revenues.  In Latin 
America, only Guatemala has a lower tax collection rate than 
Mexico.  Reasons for such poor collection include a large 
underground economy, complex tax laws, numerous preferential 
regimes and exemptions that allow companies and individuals 
to significantly reduce effective tax rates, and a 
generalized "why should I pay?" sentiment that stems from a 
lack of confidence in how tax dollars will be used and from a 
feeling that everybody wants someone else to pay. 
 
¶3. (U) Regarding the value-added tax (VAT), numerous 
exemptions (e.g. books and public transportation) and a large 
proportion of goods and services with a zero tax rate (e.g. 
food) mean that only a small part of the potential base is 
actually being taxed.  Although the zero-rating and 
exemptions are often perceived as helping poorer families, an 
OECD study shows that more affluent households gain the most 
since they buy more goods in general, including those with a 
zero tax rate. 
 
------------------------------- 
Government Lobbying for Support 
------------------------------- 
 
¶4. (SBU) President Calderon and members of his administration 
in recent weeks have been meeting with Congress to build 
support for fiscal reform.  A contact from the Chamber of 
Deputies told econoff that the government would like to call 
a special session of Congress to debate the proposal in the 
June-July timeframe.  Marco Oviedo Cruz, the Director of 
Financial Planning in the Finance Secretariat (strictly 
protect), told econoff on May 14 that the government would 
like to have the reform signed into law before the 
President's federal budget proposal is due to the Chamber of 
Deputies on September 8 so the new measures can be included 
 
MEXICO 00002518  002 OF 004 
 
 
in the 2008 budget.  He added that, ideally, the proposal 
would be approved before the ordinary session of Congress 
opens on September 1 because discussions at that time will be 
dominated by the 2008 budget.  Gustavo Madero, the President 
of the Senate Finance Committee, (strictly protect) echoed 
this timeline, and added that Plan B was to approve fiscal 
reform between September and December 2007 and Plan C was to 
approve it between February and April 2008.  Madero said that 
the window of opportunity could be lost after April 2008 
because the lower house of Congress would be gearing up for 
the 2009 elections. 
 
¶5. (SBU) As Calderon's National Action Party (PAN) lacks a 
majority in Congress, it will need support from the 
Institutional Revolutionary Party (PRI) to pass the 
initiative.  Several contacts have told econoff that the 
debate over fiscal reform is currently in a holding pattern 
because of the May 20 election in Yucatan -- the first local 
race held during the Calderon administration.  The PAN 
candidate hopes to retain the state's governorship, while the 
PRI is betting on taking back a state it governed for more 
than 60 years.  Some members of the PRI are already crying 
foul and alleging that Calderon is interfering in the 
election.  Both HSBC economist Alejandro Martinez (strictly 
protect) and Oviedo Cruz said that the PAN should be able to 
count on PRI support for fiscal reform if the PRI candidate 
wins the race, but not necessarily if she loses.  Madero 
implied the same when he told econoffs that the PRI was using 
this election as a "threat."  He added, however, that his 
counterparts in the Chamber of Deputies have been willing to 
work closely with the Senate and the PAN to pass the reform. 
 
¶6. (SBU) The PRI is not lending its support as readily as it 
did earlier this year for pension reform.  The PRI, which 
controls 17 state governments, has said it wants states to 
have more control over the funds they receive from the 
federal government.  Oviedo Cruz acknowledged that the 
government agrees that the states need more resources, but 
added that it wants states to show more transparency in how 
they spend public funds.  Finance Secretary Carstens has said 
publicly that he does not want to give the states more money 
from the federal budget or increase their ability to raise 
funds on their own without guarantees that the money will be 
spent responsibly. 
 
¶7. (SBU) Moreover, senior PRI members have said publicly that 
their party is willing to support fiscal reform as long as it 
does not include taxing food and medicine -- long a 
controversial issue here -- and as long as the Secretariats 
of the Environment, Social Development, and Agriculture are 
decentralized.  The PRI claims that these secretariats at the 
state level are used to curry favor with the public and build 
political support. 
 
¶8. (SBU) Echoing comments from a contact at the stock 
exchange, Madero said he expects a "light" fiscal reform 
because the government wants the initiative passed before 
September 8.  In his opinion, the final reform "will not be 
in proportion to the size of the problem."  Madero told 
econoffs that fiscal reform is significantly more difficult 
to pass than pension or energy reform because everyone is 
affected by fiscal reform, not just a particular union or 
segment of society.  Moreover, while everyone agrees what the 
problem is, ideas about how this problem should be solved 
vary widely.  On a positive note, Madero praised Calderon's 
and Finance Secretary Carstens' negotiating skills, noting 
the improvement from the previous administration. 
 
------------------------- 
Details of Proposal Scare 
------------------------- 
 
 
MEXICO 00002518  003 OF 004 
 
 
¶9. (SBU) The government has not disclosed the specifics of 
its plans to overhaul the tax system, but Under Secretary of 
Revenue Fernando Sanchez Ugarte has said publicly that the 
Finance Secretariat's tax reform proposal aims to simplify 
the tax system, reduce administrative costs, and make the tax 
system more flexible, transparent, equitable, and better able 
to promote competitiveness.  Oviedo Cruz told econoff that 
their goal is to boost revenues by 2-3% of GDP in the coming 
years. 
 
¶10. (SBU) Oviedo Cruz told econoff that the government would 
not impose the value-added tax (VAT) on food and medicine in 
its proposal because it knows that this would never be 
approved in Congress.  He said that fiscal reform "is already 
becoming controversial," noting a leaked recording in which 
press reports say Carstens asked deputies to reconsider the 
subsidies the government gives people whose salary is less 
than the equivalent of four minimum wages.  This subsidy 
completely covers these workers' tax bill, and even leaves 
them with a little extra.  Oviedo Cruz told econoff that the 
government does not plan to go after people in the lower 
income brackets to increase tax collection. 
 
¶11. (SBU) Gustavo Madero shed more light on the proposals 
currently being discussed.  He acknowledged that the idea of 
charging the VAT on food and medicine has been discarded, but 
noted that they may try to find another way to do essentially 
the same thing for food items, which have the potential to 
notably increase revenues (Comment: he did not specify how 
they would accomplish this, but press reports have noted a 
few alternatives, including having the government eliminate 
tax refunds for food producers.  End Comment).  He added that 
the idea of charging the VAT on food has become so 
politicized that alternative proposals could not even 
resemble a VAT.  Madero said that another proposal being 
discussed is a flat tax.  The problem the PAN, and the PRI in 
particular, face is eliminating the unions' privileges and 
deductions.  He opined that a way around this problem is to 
eliminate deductions in general and to simplify the tax 
system. 
 
¶12. (SBU) In Madero's opinion, the government should strive 
to increase the small base of contributors.  He said that 
about 80% of total tax collection comes from the rich, and 
that the poorest 40% of the population do not pay taxes.  He 
wants to capture more tax revenue from the people in the 
middle of this spectrum.  Madero also would like to see the 
states and municipalities increase their tax collection.  He 
said that the federal government currently collected 92% of 
taxes, and the states only 8%.  However, the government 
spends 48% of federal funds, and the states 52%.  There are 
very few local taxes, and states and municipalities are poor 
at enforcing tax collection.  As an example, he cited the 
property tax, a municipal resource, which only represents 
0.3% of GDP. 
 
¶13. (SBU) Comment:  The importance of implementing a reform 
that increases tax collection, reduces tax evasion, makes 
government spending more efficient, and lowers the country's 
dependence on oil revenues cannot be understated.  Such a 
plan is needed to create a broader and more stable base to 
finance government spending and to meet growing social 
spending needs.  While it is disappointing to hear some 
already saying that the reform may be "light," it is not 
completely surprising given the fact the government is asking 
people to pony up more money.  It is better to have a "light" 
reform that gets passed than no reform at all.  End Comment. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity and the North American 
Partnership Blog at http://www.intelink.gov/communities/state/nap / 
 
MEXICO 00002518  004 OF 004 
 
 
GARZA