Among the main reasons why infrastructure projects are not being developed at the necessary rate is the lack of government budget to fund them. According to the OECD’s Revenue Statistics in Latin America and Caribbean report, Mexico is among the six countries with the least total tax income in the region. In fact, the Mexican government collects 17.4 percent of GDP through taxation while the average OECD country’s income is 34.3 percent.
Part of the issue is political motivation. Few politicians want to impose new taxes at the risk of losing potential votes, especially at the local level. An example is the country’s property tax, which is often used as a means to invest in the development or improvement of local infrastructure. Municipalities have the right to collect these taxes but according to the Mexican Institute for Competiveness (IMCO), only 57 percent of municipalities carry out property appraisals, representing 0.2 percent of Mexico’s GDP. The average in OECD countries is 1.1 percent.
“Local entities often wash their hands of collecting more taxes so they do not pay a political cost, as is the case of the tenure tax, which they can collect but choose not to,” says Diego Diaz, a researcher at IMCO. According to the UN FAO, tenure tax can be applied to areas such as commercial farmland to encourage the efficiency of the agriculture carried out on the land. “Taxation related to tenure rights is an important source of revenue for central and local governments, and such taxes should be based on appropriate values,” says the organization.
Because there are neither positive nor negative incentives for individuals and companies to pay taxes, many do not pay at all. According to an INEGI study covering 2003 to 2012, 59.8 percent of Mexico’s total population participates in the informal economy, which is responsible for around 26 percent of GDP. According to the Public Account of the Federal Superior Audit, in 2016, tax evasion cost the Mexican economy MX$483 billion, representing 2.8 percent of GDP.
The lack of collection of local and state taxes pushes the states to go further into debt. According to the Center for Economic and Budgetary Research (CIEP), debt of municipalities and states increased 150.7 percent between 2000 and 2017. Because they are no longer able to take on more debt, these entities look to the federal government for support. A study by Mexico Evalua found that between 2011 and 2017, states received over MX$260 billion more than the amount approved by Congress in the federal budget.
In 2015 alone, INEGI data states that 86 percent of states’ total income came from the federal government itself, the highest percentage in the last 10 years. But the main mandate of the federal government is to fulfill the needs of the country as a whole, therefore prioritizing federal infrastructure projects and at times placing the needs of small cities and states on the back burner.
Mexico’s cities are growing rapidly and to allow the country to reach its Sustainable Development Goals (SDGs), it should invest US$544 billion from now until 2040. According to the World Bank, Latin American countries on average invest 3.3 percent of their GDP in infrastructure development, while most Asian and Pacific countries invest an average 7.7 percent of their GDP. For Latin American countries, including Mexico, to bridge their gaps, the Economic Commission for Latin America and Caribbean (CEPAL) estimates that they would have to invest 6.2 percent of their GDP annually for eight years. From 2013-2017, Mexico invested US$16.56 billion a year, approximately 1.58 percent of its GDP, according to Global Infrastructure Hub data.
The private sector can help, and it has been more active in the infrastructure sector, having invested over US$12.2 billion from 2013-2017, but there are many projects that must be constructed by the public sector as they are not financially viable for the private sector alone. Among the top areas requiring attention is social infrastructure, such as schools and hospitals, especially as city populations continue to grow. Another sector that is drastically underserved by municipalities and cities is water and waste management, whose social importance make them far more intricate cases. In particular, there needs to be a distinction between what is a right and what is a service, says Roberto Olivares, President of RELOC and Former Director General of ANEAS. “There is a difference between the right to access water and potable water services as the latter has an economic variable since water infrastructure has an economic value. The focus must be on exploring the possibilities for private participation and association for water services,” he says. According to Ignacio García de Presno, Lead Partner of Global Infrastructure and Projects Group at KPMG, the optimal medium-term solution is PPPs. “The government does not have the money to spend on infrastructure and the country’s tax structure is very limited,” he says.
WHAT WILL IT TAKE?
The fact that 53.4 percent of Mexicans do not pay taxes limits not only the country’s economic development but the construction of the country’s most pressing infrastructure. While 50 percent of the population lives in poverty, many are also informal workers and García de Presno believes incorporating this demographic into the formal economy would be a big step forward for tax collection. More than 57.6 percent of the employed population in Mexico works in the informal sector, generating 22.6 percent of the country’s GDP. According to the National Survey of Occupation and Employment (ENOE), from 2012 to 2015, the largest increase in informal employment occurred in the construction sector with 350,956 workers. Formalizing the construction sector could have a huge impact on tax collection and provide the government with the money necessary to not only upgrade IMSS, ISSSTE and other public institutions to offer workers better health and education services, but also build better streets, MTS projects and water infrastructure that the country needs.
While countries like the Netherlands are often referenced as infrastructure models for their access to free education, free water and other public services, García de Presno says there is a reason for that. “What is not explained is that, in the Netherlands, the highest tax bracket is 52 percent, while the lowest is 37 percent,” he explains. “This is how these countries can afford to offer better services to the people.” He says in Mexico these examples are used to demand the same system without paying the same levels of tax. “On paper it is a simple discussion but in practice it is very complicated to reconcile agendas across all governments and states,” he says. “But we can start with a comprehensive tax reform.”
Roberto Olivares and Ignacio García de Presno participated as panelists at Mexico Infrastructure & Sustainability Summit 2018, at the Marquis Reforma hotel in Mexico City this November 14! Find the highlights of his panel here or click here to register for next year’s event!