If Mexico’s national congress passes a proposed tax reform package, border residents could start paying a lot more for goods and services.
Or, they could start doing a lot more shopping in the U.S.
Under the reform proposed by Mexican president Enrique Peña Nieto, the sales tax in Mexico’s northern and southern border regions would rise from 11 percent currently to 16 percent.
The rest of Mexico already pays a 16 percent sales tax, but the border region has paid a reduced sales tax since 1980. That’s because it’s assumed that residents of Mexico’s border region will choose to shop across the border — in the U.S. on the northern border — if goods are significantly cheaper there.
U.S. border cities, like San Diego, El Paso and Tucson, all have sales tax rates around 8 percent.
The proposed reform would not affect food or medicine.
Still, Mexican border businesses and economists worry that the reform will have serious negative impacts on the economy of cities like Tijuana.
Noé Arón Fuentes, an economist at the Colegio de la Frontera Norte (COLEF) in Tijuana, recently wrote a paper predicting the reform would cause a 2.2 to 2.6 percent decline in the GDP of Baja California.
Fuentes also predicts that the tax hike burden would fall disproportionately on the shoulders of poor border residents, since they are less likely to have the means and, most importantly, the visa to shop in the U.S.
The proposal to unify Mexico’s sales tax is part of a larger effort to reduce the country’s dependence on revenues from the state-owned oil company, Pemex, and to increase the federal government’s tax income in order to pay for a national pension system and unemployment insurance.
However, opponents of the border region tax hike say the Mexican government could actually collect fewer taxes if border consumers are forced to spend less, or if they opt to shop in the U.S.
“The federal government is trying to identify more sources of income, and probably did not really stop and reflect about the impacts that it could have,” said Flavio Olivieri, CEO of the Tijuana Economic Development Corp., which promotes business growth in the region.
Olivieri and other Mexican business leaders are lobbying their congressional representatives to get the tax hike removed from the final bill.
Of course, the tax reform could be good news for U.S. businesses in the border region. The San Diego-Tijuana consulting firm, Crossborder Group, estimates that Mexican residents spend a minimum of $3.5 billion annually on shopping trips to San Diego.