San José, Costa Rica, since 1956

Tax reform win: Will it matter?

From the print edition

Bickering, contentiousness and holdups have defined tax reform debates from its original incarnation in early 2011, all the way up until the bill’s passing through the Legislative Assembly’s first round of voting late Wednesday night. 

Proponents, led by the ruling National Liberation Party (PLN) are celebrating the bill’s passage. But in upcoming months, that vote might not even matter. 

The backbiting will outlive Wednesday’s vote and looks to unravel the process. In the interim, the country edges toward financial trouble. 

Attention now turns to the Constitutional Chamber of the Supreme Court (Sala IV). Two motions challenging the bill’s constitutionality filed by the Social Christian Unity Party’s Luis Fishman, who claimed there were errors during the first debate voting procedures, could force the process to start over. 

“This whole procedure has been rushed, carelessly treated,” said José María Villalta, of the Broad Front Party. “The [PLN’s] only hope is that the Sala IV says they are right and the bill is fine just like it is.”

Legislative President Juan Carlos Mendoza agreed, saying he was “sure there are errors” that the Sala IV will find in the way the bill was drafted, which will force lawmakers to revisit articles again. Mendoza broke with his own Citizen Action Party (PAC) to vote against the bill. 

Until the Sala IV rules on those actions, the bill will not go to a second vote. The court has 30 days to issue a ruling. If the bill passes a second vote, the legislation goes to the president to be signed into law. The delays – Fishman has threatened to file further legal actions – could extend through the end of the year if no compromises are reached. 

The primary goal of the fiscal reform package is to make tax collection 1.5 percent of gross domestic product. The most significant change proposed to accomplish that is an increase from a 13 percent sales tax to a 14 percent value-added tax.

This would result in additional charges on services like private education and private health services, and for professionals including lawyers and engineers.

For now, President Laura Chinchilla can enjoy a minor victory by moving the key issue of fiscal reform past the first debate, even if that triumph could be fleeting. 

Members of Chinchilla’s party lashed out at stall tactics and legal actions taken by the opposition to try to hinder the current bill’s progress. 

“It has all been a game here,” Luis Gerardo Villanueva, of the PLN, said. “This whole thing has been nothing but a bunch of games, with the only purpose of making us slip up.”

Costa Ricans resisting more taxes protested outside the assembly on Wednesday as representatives prepared for the vote.

Shortly before 8 p.m. lawmakers voted on the bill, with 31 in favor and 19 against. The votes for the bill all came from two parties – the PLN (22 votes) and PAC (8 votes) – except for a sole vote from evangelical lawmaker Carlos Avendaño.

Chinchilla formed a historic alliance with PAC leader Ottón Solís to receive the extra votes. The compromise included taxing firms inside free zones and a reduced value-added tax for health and education services.

Five parties voted against the bill, including all the members of the Libertarian Movement, the Social Christian Unity Party, the Accessibility Without Exclusion Party and the Broad Front Party. Two members of PAC – legislator Mendoza and Carmen Muñoz – also voted against it.

The vote came long after legislators moved to “fast-track” the process, which intended to bring the legislation to a vote last December. Instead, the bill faced more changes, and since last January lawmakers filed some 7,000 motions against various  articles in the bill. 

Assembly members reached an agreement to dismiss 3,000 of those motions this week so that the bill finally would be voted on – six months after the fast-tracking decision was made. And it is the legality of the fast-tracking method that Fishman is challenging.

Passing a fiscal reform bill has remained a necessity since Chinchilla took office in 2010. The legislation that succeeded this week was the third version of the reform. Finance Minister Fernando Herrero presented the original document on Jan. 23, 2011. More than a year later, a middle ground stays tentative (see Editorial).

Economic disaster could befall Costa Rica if reforms do not take place, say experts. Government debt is nearing 6 percent of GDP, and the gap is expected to widen, possibly to 10 percent if reforms are not passed by 2014, according to Central Bank officials.

Tax increases could generate an additional $850 million in annual revenue.

“Currently, we are financing about ₡1 trillion [$2 billion] with debt,” Herrero told The Tico Times “We are paying salaries with debt. It is like paying for dinner with a credit card. You can do it sometimes but not permanently” (TT, Dec. 16, 2011).

The finance minister praised the reform’s approval “as an essential step in the government’s efforts to adequately provide funds for public services.” 

But whether the legislation has any chance of being enacted in the near future will depend on Sala IV judges.

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