Peña Nieto wins major battle over tax reforms with help from leftist lawmakers

Mexican President Enrique Peña Nieto scored a major victory on Thursday for his sweeping tax-restructuring proposals when the Chamber of Deputies passed the reform, which will raise taxes for high earners and impose price-hikes on sugary soft drinks and other products that cause obesity.

The Institutional Revolutionary Party (PRI) government had until Sunday to get the law passed and faced fierce opposition from the conservative lawmakers from the National Action Party (PAN). The PRI mustered support for the leftist Democratic Revolutionary Party (PRD).

The bill now goes to the Senate, where it is expected to be approved.

While modifications were made to the original tax-reform package that Peña Nieto presented on September 9, the proposed law is essentially the same. One important highlight is the creation of a simple tax structure that will see workers who hold informal jobs pay into the system. It is believed that 60 percent of workers in Mexico are in the informal economy.

The new measures also include a green tax, but natural gas and crude remain exempted

Special taxes will be imposed on soft drinks and junk food, such as ice cream and other products that the government lists as having no nutritional value, as a way of combating obesity. Mexico is the number-one country in the Western Hemisphere when it comes to obesity. According to a report released this summer by the UN Food and Agriculture Organization (FAO), Mexico’s adult obesity rate is 32.8 percent, just slightly higher than the 31.8-percent rate in the United States, which for years held the top ranking.

When Peña Nieto announced his new tax measures, he described the package of proposals as “social reforms.” This catchphrase was one that was repeated during debates in the lower chamber by PRD lawmakers, who defended their alliance with the PRI.

The PRD deputies also backed certain changes to the reforms, including the decision not to impose value-added tax (VAT) on people who pay rent. They also claimed victory in changes made to the tax rate for high-income earners.

Peña Nieto’s original proposal called for a 32-percent rate for citizens who earn more than 500,000 pesos (some $38,000) annually. Now the rates will vary from 31 percent to 35 percent for those who earn 500,000 pesos to more than three million pesos a year.

The PAN bench in the Chamber of Deputies voted against the measures. From the beginning, the conservative lawmakers pushed for VAT rates on some foodstuffs and pharmaceutical products – both are exempt from VAT. Earlier in the year, the PRI had originally said that they would introduce the special tax on these items but backed down at the last minute before Peña Nieto announced his reform last year.

PAN officials also pressed for VAT exemptions on dues paid to professional associations – something that the PRI finally agreed to.

The new measures also include a green tax, but natural gas and crude remain exempted.

Nevertheless, the PRI government has acknowledged that estimates on how much revenue will be generated by the tax restructuring are lower than the projections originally announced. Treasury secretary Luis Videgaray said that the tax code will bring in some 55.7 billion pesos annually, or $4.3 billion. During his presentation in September, Peña Nieto predicted that the revenue would make up three percent of Mexico’s GDP by 2018 after starting at 1.4 percent next year.

The tax-restructuring plan is part of a series of controversial reforms that Peña Nieto is pushing through Congress. The Mexican leader is encountering fierce opposition from Mexico’s teachers over his education reform. At the same time, leftists have threatened to call nationwide demonstrations if Peña Nieto doesn’t back down on his plans to open state-owned Petróleos Mexicanos (Pemex) to private investment as he proposes under a sweeping energy reform.