Mexican Retailers Dread Higher Sales Tax In New Year
Mexican border cities will be hit with a higher sales tax in the New Year. The change is part of a major tax reform passed earlier this year by Mexico's Congress.
As a result, Mexican retailers near the northern border, who already face stiff competition from American stores, fear they will lose even more business.
Days before Christmas, a lone violin player serenaded a steady stream of shoppers near the international bridge that connects downtown El Paso with downtown Ciudad Juárez. The sound was soothing amid the chaos of last-minute shoppers. This time of year, being blocks away from the Mexican border is a retailer's dream. Shoppers like Humberto Jimenez are the reason why.
"I've waited up to five hours in the cold to cross into El Paso," he said.
Jimenez is a tailor who lives in Juárez. He and thousands more make an annual pilgrimage to buy gifts in U.S. stores. To explain why Jimenez points to a square shaped box wrapped in plastic.
"This video game would've cost me $30 in Mexico, but here it cost just $17," he said.
In Mexico tariffs make certain things like toys, clothes and some electronics more expensive, so those who can, flock north to buy them in American stores. That’s despite a sales tax rate, or value added tax (VAT), in northern Mexico that’s currently lower than the rest of the country. From California to Texas, economists estimate Mexican shoppers spend more than $8 billion each year.
America's gain is Mexico's loss. The business community in Juárez recently produced radio and TV spots encouraging residents to shop local.
Back in 1980, Mexico lowered the VAT in the border region so cities like Juárez could better compete with their northern neighbors. Right now their VAT is 11 percent. The rest of the country pays 16 percent. But that will soon change.
"Beginning in 2014 the border region will pay the same value added tax as the rest of the country," said Carlos Escobar, president of the Juárez Chamber of Commerce.
Like many other border businessmen, Escobar is adamant that the tax hike is a bad idea.
"The Juárez economy is just getting back on its feet," he said.
The city took a double hit, first by the economic crisis in 2008 followed by a vicious wave of drug violence. A higher tax, Escobar said, will only make things worse. He predicts sales will decline, businesses will close and unemployment will rise.
Those who can shop in the U.S. will likely do so in greater numbers, he said. American border states have a lower sales tax than Mexico.
"About 40 percent of Juárez residents have a visa to cross into the United States," he said.
Those without a visa, he added, will likely be the ones hit hardest by the tax hike.
But Mexico is in dire need of tax reform, according to Chris Wilson of the Woodrow Wilson Center in Washington D.C.
"Mexico needs to raise revenue so that it has a sustainable source of income for everything that government does," Wilson said.
Mexico is short on tax revenue. Its biggest cash cow, the state-owned oil company Pemex, is rife with corruption and inefficiency. Nearly two-thirds of the country works in the informal sector and doesn't pay its full share of taxes. Additionally, having two different tax rates creates the opportunity for fraud.
"Some companies … make it look like they were making purchases in the border region when in reality they were making those purchases in other parts of Mexico," Wilson said. "By doing that they had to pay less taxes."
Simplifying the tax structure with one single rate could make it easier for Mexico to enforce its tax laws. That, in turn, could yield greater tax revenues. Wilson said there's also the sense that the current system is unfair, with wealthier northern states paying a lower tax rate than poorer states in the south.
Still, none of this is of any comfort to Mexican retailers near the border.
In downtown Juárez, street salesmen hollered holiday specials at passing pedestrians. Fernando Mendoza sells rhinestone-studded jeans and women's blouses steps away from the central cathedral. On the Friday before Christmas his store was practically empty. His shop is only five blocks from the competition on the U.S. side.
"Sales are down and rent is high," he said. "If our sales tax goes up, the local economy doesn't stand a chance."