Key lawmaker resigns on eve of tax reform debate

January 6, 2011

Legislator and former finance minister Guillermo Zúñiga said he will be stepping down on Jan. 17, the same day lawmakers begin discussion of an overhaul of the tax system, the daily La Nación reported.

 Zúñiga’s pending resignation complicates President Laura Chinchilla’s efforts to rewrite the tax laws because the lawmaker would have presided over debate in the assembly. Now, tax reform could be in serious jeopardy, according to Eurasia Group,a political consulting firm.

“Negotiations will be extremely difficult and slow, and it is highly unlikely that any meaningful reform will be approved [for the simple reason that] Chinchilla’s National Liberation Party (PLN) lacks the 29 votes necessary to pass legislation,” analysts Heather Berkman and Risa Grais-Targow said in a report.

Chinchilla has said on a number of occasions that tax reform is crucial for Costa Rica’s economy, which is facing the biggest fiscal deficit the country has seen in two decades.

Under the proposed tax reform, the number of exemptions from the 13-percent value-added tax (VAT) would be reduced from 300 to 50; a 15-percent tax would be applied to capital gains (which is currently untaxed); and only the country’s top wage earners (an estimated 10 percent) would pay an income tax, according to the Eurasia Group. The current system levies a progressive tax on all wage earners. The reform would take steps toward eliminating tax evasion and levy a security tax on online sports betting sites.

The proposal has failed to garner support from lawmakers, as the right-leaning Libertarian Movement is opposed to any attempts to raise taxes. Left-leaning Citizens Action Party also opposes the reform package. Even Chinchilla’s own PLN is divided over the issue.

Yet, without tax reform, the government will be forced to make deep cuts in spending or issue more debt.

“The government is reluctant to cut spending, as doing so would mean reducing Costa Rica’s traditionally (and often touted) high expenditures on social programs, or cutting public sector jobs or wages – a politically unpalatable idea,” the Eurasia Group report said. “The government is more likely to issue more debt (thus raising interest rates and financing costs).”

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