Mexico's Senate approved a watered-down version on Friday of President Felipe Calderon's proposal to raise the value-added tax rate in order to reduce Mexico's dependence on its waning oil industry. The vote marks a partial victory for Calderon, whose original plan would have broadened Mexico's tax base but was rejected in the lower house last week.
It was unclear if the rise in Mexico's value-added tax, or VAT, would be enough to stave off a looming credit rating downgrade. After clearing the lower house, the measure would go to Calderon's desk unless last minute amendments are added that would require approval by the lower house.
Debate continued in the Senate over possible minor tweaks to the bill, which is part of the revenue portion of the 2010 budget. Calderon lacks a majority in either chamber. Mexican government revenues have plunged this year because of a severe recession and a slump in oil production, which is down by about a quarter from 2004 levels. The fall in oil output has removed a long-time crutch for public finances that for decades allowed Mexico to keep its tax take at one of the lowest levels in Latin America. A legacy of corruption has also left Mexicans sceptical about taxes.
DOWNGRADE LOOMS Mexico only collects about 10 percent of gross domestic product in taxes - roughly on a par with Haiti - and debt rating agencies are threatening a downgrade if Mexico's government doesn't boost non-oil revenues. Calderon's conservatives lack a majority in both houses of Congress, and were unable to convince the main opposition party to back a 2-percent sales tax on all goods without exception.
Instead, the opposition Institutional Revolutionary Party, or PRI, supported a government counterproposal in the lower house to raise the VAT tax to 16 percent from 15 percent. The bill approved by the Senate would also raise the top income tax rate to 30 percent from 28 percent.
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