On eve of tax reform debate key lawmaker resigns

Friday January 14 th 2011

This week President Laura Chinchilla's proposed tax reform hit a snag as the lawmaker responsible for shepherding the reform through the Legislative Assembly announced his resignation.

Guillermo Zúñiga Legislator and former finance minister said he will be stepping down on January 17, the same day lawmakers begin discussion of an overhaul of the tax system.

This pending resignation complicates President Laura Chinchilla's efforts to rewrite the tax laws because the lawmaker would have presided over debate in the assembly. Now, tax reform could be in serious jeopardy, according to political consulting firm Eurasia Group.

"Negotiations will be extremely difficult and slow, and it is highly unlikely that any meaningful reform will be approved [for the simple reason that] Chinchilla's National Liberation Party (PLN) lacks the 29 votes necessary to pass legislation," analysts Risa Grais-Targow and Heather Berkman said in a report.

"Tax reform is crucial for Costa Rica's economy" (which is facing the biggest fiscal deficit seen in two decades) has said In many occasions President Chinchilla.

The proposal has failed to garner support from lawmakers, as the right-leaning Libertarian Movement is opposed to any attempts to raise taxes. Left-leaning Citizens Action Party also opposes the reform package. Even Chinchilla's own PLN is divided over the issue.

"The government is reluctant to cut spending, as doing so would mean reducing Costa Rica's traditionally (and often touted) high expenditures on social programs, or cutting public sector jobs or wages - a politically unpalatable idea," the Eurasia Group report said. "The government is more likely to issue more debt (thus raising interest rates and financing costs)."

Number of exemptions from the 13-percent value-added tax (VAT) would be reduced from 300 to 50; a 15-percent tax would be applied to capital gains (which is currently untaxed); and only the country's top wage earners (an estimated 10 percent) would pay an income tax, under the proposed tax reform, according to the Eurasia Group. On all wage earners The current system levies a progressive tax. The reform would take steps toward eliminating tax evasion and levy a security tax on online sports betting sites. The government will be forced to issue more debt or make deep cuts in spending ,yet, without tax reform.