Costa Rican finance minister resigns after reports that he underpaid property taxes

April 2, 2012

Finance Minister Fernando Herrero stepped down on Monday after the daily La Nación published an investigation last week revealing that the minister was not paying his fair share of taxes at the same time he was lobbying for a reform package that would hike taxes for most Costa Ricans.

In a letter to President Laura Chinchilla, Herrero said he resigned to “protect [the president] and [her] administration,” and that implementing the president’s policy goals – including a sweeping fiscal reform plan that would hike taxes – “requires the full attention of [Chinchilla] and members of the cabinet, and I’m not going to permit the use of my name to create obstacles for the great changes that we are dreaming of implementing.”

The La Nación investigation revealed that Herrero and other government officials for many years had declared property values at lower than market rates in order to pay less taxes than the law required. Some officials who responded to La Nación’s report erroneously said it was the duty of municipalities to update the values of their properties. Herrero failed to pay at least $600 per year on two family properties that were undervalued.

Chinchilla called on the officials mentioned in the report to bring up to date the declared value of their properties, and said Costa Rica has a culture of underpaying property taxes. She stopped short of asking top members of her cabinet to step down.

The president acknowledged over the weekend that Herrero’s “mistake” had jeopardized administration efforts to push forward a fiscal reform plan aimed at reducing Costa Rica’s burgeoning fiscal deficit, now close to 5 percent of gross domestic product.

The reform plan, which includes a 14 percent value-added tax and other tax hikes for businesses, among other measures, has generated opposition among business sectors and unions. Among the supporters of the measure are members of Chinchilla’s own political party, the National Liberation Party, and the Citizen Action Party, who were instrumental in pushing the tax bill through a first round of voting in the Legislative Assembly on March 15.

Currently, the Constitutional Chamber of the Supreme Court is reviewing the constitutionality of the bill. If the court gives the measure the green light, it will return to the assembly for a second and final round of voting.

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