San José, Costa Rica, since 1956

Details of New Tax Plans Still Under Wraps

President Oscar Arias and his ministers have been continuing the previous administration’s calls for tax reform to address the country’s fiscal crisis, but nearly a month after Inauguration Day, Arias and Finance Minister Guillermo Zúñiga are still working on their proposals to the Legislative Assembly. Zúñiga said Wednesday that he will meet this weekend with Arias and his brother, Presidency Minister Rodrigo Arias, to examine drafts of the bills and finalize their plans.

The Finance Minister, who outlined Arias’ goals and financial plans before an audience of business leaders at a lunch hosted by the Union of Private-Sector Chambers (UCCAEP) in San José, touched on the same messages so often expressed by his predecessors during the term of President Abel Pacheco (2002-2006): new taxes are crucial if the central government is to address the gap between its income and expenses, reduce inflation, and increase spending on infrastructure, education and other priorities.

Arias’ proposed tax changes will be presented to the assembly in three separate bills, in contrast to the massive Permanent Fiscal Reform Package that spent most of Pacheco’s administration in the assembly without being approved. That reform would have altered the way income tax is calculated and replaced the sales tax with a broader value-added tax, among other changes, generating estimated additional revenue of approximately ¢190 billion ($380 million) per year (TT, Feb. 17).

After thousands of proposed amendments within the assembly and multiple rulings against the plan by the Constitutional Chamber of the Supreme Court (Sala IV), legislators finally approved the bill in first debate in February; however, the Sala IV effectively killed the bill by ruling that legislators had violated assembly procedure in their handling of the reforms (TT,March 24).

“We’re segmenting the themes and concentrating on (new) taxes,” Zúñiga told the press after Wednesday’s event, explaining that the new plans – expected to increase government revenue by approximately ¢420 billion (approximately $824 million) per year – won’t contemplate some of the additional changes proposed in the Reform Package, such as a restructuring of the General Tax Administration. “Separating the bills allows us to advance them simultaneously in the assembly.”

He emphasized that though his ministry will present the best proposals it can, the country’s fiscal future lies squarely in the hands of the assembly and its Finance Commission. Zúñiga visited the commission Tuesday to offer legislators his full support as they consider the reforms, he said.

“Any time we waste is irrecoverable,” he told the press.

According to Finance Ministry data, the government’s financial resources in the 2006 budget cover just over half of the projected spending, which totals almost ¢2.8 trillion ($5.5 billion). Half of the planned expenditures are payments related to the national debt, with other sizeable segments going to public-worker salaries and pensions, leaving only 3.48% of the total spending for investment and 1.9% for services.

The Pacheco administration reduced the gap between income and spending to its lowest point since 1995. In 2005, spending was 16.1% of the gross domestic product (GDP), with tax revenue at 13.7%. Zúñiga praised the previous government’s fiscal austerity but said those tight purse strings have resulted in pothole-filled roads and other problems.

“It’s a very meritorious control, but it doesn’t resolve the problem,” he said, emphasizing the need for additional tax income.

Uncertainty continues to surround the specifics of the Arias tax plans. Zúñiga said one of the decisions to be discussed this weekend is whether the first of the three bills will entail a value-added tax or a sales tax.

The second bill will reform the country’s Code of Tax Norms and Procedures, and the third will include new taxes, he said. To study the issue of income tax, the government has formed a special commission with legislators from various parties; the group’s first meeting took place yesterday. The commission is part of the May 1 agreement between the National Liberation Party (PLN), which brought Arias to power, and the Libertarian Movement Party, which opposes increased taxes and who led the opposition to the Permanent Fiscal Reform Package, filing most of the motions that slowed its progress.

The delay in presenting plans to the assembly has drawn criticism from some observers, such as Ottón Solís, leader of the opposition Citizen Action Party.

“I have heard from government officials that they support the current (tax reform bill), that they want modifications on it, that they want a new bill, and that they want to form a commission of outsiders. They don’t know yet what they want,” Solís told The Tico Times last week.


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