Arias Administration Plans Tax-Reform Revisions

May 5, 2006

Following the failure of the last Legislative Assembly to approve the Permanent Fiscal Reform Package, a tax plan recently sent back to the drawing board by a court ruling after years of debate, the financial leaders of the incoming presidential administration plan to divide and conquer by breaking the ambitious plan into smaller and, they hope, more palatable sections.

According to the daily La República, incoming President Oscar Arias and his team plan to present the plan to the new lawmakers in pieces, such as one bill that would reform the way income tax is paid, and another that would replace the sales tax with a value-added tax. The failed tax plan combined all these proposals in one massive document.

La República reported that outgoing legislators are among those who recommended this change, saying approval of the measures would be faster and more efficient if they are presented separately. The section to reform the income-tax system has already been presented to the assembly s Finance Committee, in charge of reviewing tax reforms before sending them to the assembly floor.

Incoming Finance Minister Guillermo Zúñiga has already been in touch with the incoming party leaders within the assembly in hopes of laying the groundwork for future negotiations.

Supporters of the reforms say Costa Rica is offering developed-world social programs with a tax system typical of an undeveloped nation, and badly needs the reforms to increase funds for the central government. The current incarnation of the plan would create a new tax administration, uniting powers now distributed among various agencies. It was expected to increase government revenue by approximately $380 million per year (TT, Feb. 17).

The assembly finally approved the plan in February (TT, Feb. 24), but its proponents victory was short-lived; the Constitutional Chamber of the Supreme Court (Sala IV) ruled a few weeks later that the assembly had violated constitutional procedure in its handling of the bill. This set the plan back several years and prompted Arias team to begin preparing a new strategy (TT, March 24).

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