Getting the local government to collect their own taxes

In Mexico City, the land levy known as 'predial' is collected by the city's Ministry of Finance, as established by the Código Fiscal del Distrito Federal (Art. 126-133). The tax is set based on the value determined by a government official or institution (Art. 22 of the same code) by considering its market value, the type of building, and other characteristics (known as valor catastral). On December 29th 2012, the Mexico City House of Deputies vetoed a proposed law which intended to fix the land tax based only on considerations of market value (namely, valor comercial).

As with any law, the proposal has its strong and weak points. On the positive side, we can consider the increase in revenues. Currently, the 'predio' represents 6.58% of the total revenue of Mexico City's government.

On the other hand, this tax represents only 0.40% of Mexico City's GDP, and according to the Organisation for Economic Co-operation and Development (OECD), this tax should represent at least 3% of the country GDP or local GDP. That means that local taxes are minimal, and federal taxes represent almost 95% of the total.

Moreover, the 'predio' tax is progressive, since a higher commercial value would imply a higher tax. The most standard inequality measure among economists, called the GINI coefficient, consists in measuring the gap between a perfect egalitarian society and the actual society. A score of 0 implies that there is no gap and hence the society is egalitarian. A score of 1 implies that the whole wealth of the country is owned by a single individual. At the moment, according to CONEVAL, Mexico City's GINI coefficient is 0.517, while the general GINI coefficient for the country is 0.509. As a quick comparison, Mexico City ranks low-middle among other states (ibidem). A higher tax would diminish the GINI coefficient.

This coefficient, just like the country coefficient, shows the great discrepancy among earnings, comparing with other countries such as Norway, Sweden, and Finland, where the GINI coefficient is 0.3 according to the United Nations Development Programme (UNDP).

On the negative side, the proposal would imply a general increase in land taxes, which has a direct impact on families' earnings.

With that said, it is important to mention that is not about getting the people to pay more taxes, but getting the people to pay what is correct, which means fixing the land tax under market value considerations. By doing this, the local government would have additional revenues, so the social programs could be not only greater (in amount) but more focused on the needed families.

As I pointed out in my last blog post, 35% of Mexico City's population have at least one social need, 26.5% live in moderate poverty, and 2.2% live in extreme poverty. These percentages may not be as high as they were before, but they still represent 3,124,400 people, 2,334,100 people, and 191,600 people respectively.

With that said, I would just propose the following example: what if the local government were to increase this tax to 3% of Mexico City's GDP, as the OECD recommends? Taking data for 2012, getting the 'predio' as a percentage of Mexico City's GDP from 0.4% to 3.0% would have meant an extra amount of $59,002,815,066.00 pesos, meaning that the government could have had $197,045,905,185.00 pesos to spend in 2012 instead of $138,043,090,119.00. That would mean that the per capita expenditure would have been not $15,500.00 pesos (see Table 1), but $22,125.00 pesos, an increase of 42.7%.

Table 1: Mexico City Government Expenditure (Some Entries)

Entry Amount % of total expenditure Per capita
expenditure
Health $8,538,879,710 6.19% $958.74
Drain Network $3,557,261,828 2.58% $399.41
Transport $18,145,223,040 13.14% $2,037.33
Education $4,655,115,286 3.37% $522.67
Benefits and Social Security $3,135,880,111 2.27% $352.09
Science and Technology $188,100,000 0.14% $21.12
Public Security $19,590,424,457 14.19% $2,199.59
Urbanization $6,187,139,922 4.48% $694.69
Housing $2,650,647,977 1.92% $297.61
Drinking Water $6,549,381,354 4.74% $735.36
Environmental Protection $4,581,656,113 3.32% $514.42
Total $77,779,709,798 56.34% $8,733.02

Source: Own estimates with Mexico City government data

Hopefully, in the near future, the Mexico City House of Deputies will begin to discuss this tax again, and take a look at the benefits (economic and social) that the government and civil society would receive by applying it better than today, rather than trying to impose a new tax on the labour creation, enterprises' utilities, production and/or value added tax (VAT). That is because they mitigate efficiency and productivity and, like the VAT, are regressive — which means that they don't distinguish among earning levels and thus represent a greater impact on lower-income families.

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