New Taxes, Old Economic Problems

The lame duck Honduran Congress is now piling on taxes to try and make up for the last four years of spending as the Lobo Sosa administration prepares to give way to the presidency of Juan Orlando Hernández.

On Saturday, December 21, the Congress passed a new, extensive series of taxes and rule changes designed to bring up to 4000 million lempiras ($200 million) in new revenue to the government over the next year.  The same measure imposes restrictions on the transfer of income between government branches that is expected to bring about a further 12000 million lempiras ($600 million) in savings.

Everyone will pay a new "special contribution" of 3% on all sales.  This is on top of the already existing sales tax of 12%.

All customs tax exemptions (commonly used by religious institutions, businesses aimed at tourism, newspapers, and power generation companies) are cancelled.  Telephone and cable television service will be subject to the 15% tax, but internet service will continue to be taxed at 12%.

Everyone except those given an exemption under legislation called the Regímenes Especiales de Importación y Turismo will pay a further 5% tax on taxable income greater than 1 million lempiras ($50,000).

Consumption taxes are in general regressive-- they disproportionately affect the poorest members of a population. In addition to the general impact that the Honduran poor will experience from the added special contribution tax, other aspects of the new law will sharply affect their use of energy.

Some consumers receive a subsidy on their electric service.  Until now, that subsidy has been for those who consume less than 150 kw/month.  From today forward, the subsidy will only be for those who consume 75 kw/month or less.

Gasoline will be taxed a further 5.3 lempiras/gallon ($0.25/gallon). The income is supposed to be earmarked for infrastructure and social welfare projects.

But the poor are not targeted by the new sweeping tax increases: property owners will see sharp increases in taxation as well. 

The central government will retain 10% of the gains from the purchase or sale of property, bonds, rights, and titles as a capital gains tax. Dividends will be taxed at 10% as well.

Consumption and property transfer taxes make sense as policy because Honduras has a poor record of tax collection on basic income tax. But that doesn't mean income tax rates were left alone, either.

Foreign companies will pay a tax of 10% on gross income in Honduras. Honduran companies will pay 1.5% on their gross income over 3 million lempiras ($150,000) except if their business is selling cement, services given to the government, pharmaceuticals for human consumption, petroleum products, or supplies for baking, which will pay a tax of 0.75%.

The tax law also contemplates retaining more money for the central government at the expense of entities it owes fixed levels of funding.

The new law freezes the 2014 budget for the central government at 2013 levels. But it also changes how amounts specified in the constitution for other government entities, such as municipal governments and the National Autonomous University, are calculated. Some kinds of income that previously counted in calculating the amounts to transfer will be exempt from being counted now. This means that all dependencies specified as receiving a fixed percent of the government income will receive a budget cut, while the central government will retain more.

On top of all this, there is yet another revision to the security tax.

This revision extends the security tax to cover previously exempt bank accounts with deposits under 120,000 lempiras.  Now, all savings and checking accounts will be taxed. COHEP, one of the principal business organizations in the country, warns that this might lead to capital flight.

So why is Congress doing this now?

Part of the answer is that Honduras simply has to find more revenue or the government cannot continue. And some of the answer is partisan politics, with a hand-off of government from one National Party president to another, something that has never happened since the new Honduran constitution was set in place in the 1980s. Even with the new taxes and savings envisioned under this law, it will not close the fiscal deficit under which the government operates.

Right now the lame duck Congress has enough National Party members to pass anything they want, short of a constitutional amendment. The new Congress might not be so amenable.  The National Party will not have sufficient representation to do what it wants.  It will need to make alliances with other parties in order to enact legislation, making laws like this one difficult to pass.

Most of the Liberal Party members in the present Congress opposed the new taxes, and suggested that the press headline their coverage "National Party passes new taxes". The Liberal membership in the incoming Congress will be joined by LIBRE and PAC contingents that can also be expected to be less inclined to automatically agree with the ruling party's legislative direction

The Lobo Sosa government used 1.4 billion dollars in borrowing to make ends meet this year.  Under the new tax law's projections, the increases will, at best, cover half of that.

It will be up to the next government to figure out how to cover the other half, while improving actual tax collection enough to cover those projections. And that is presumably why, along with changes in the leadership of the police and military, the first choices for government offices made by Juan Orlando Hernández included a new head of the Dirección Ejecutivo de Ingresos (Executive Office of Income), Miriam Guzman, reportedly already at work.