Mexico

American Journal of Economics and Sociology, The,  Dec, 2000  by Manuel Perlo Cohen

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MANUEL PERLO COHEN [*]

MEXICO IS A federal republic, consisting of thirty one states and one federal district. There are three levels of government: federal, state, and municipal. Each state is sovereign in the conduct of its internal affairs as provided by its own constitution, and is divided into territorial units called municipios, of which there are 2,426 throughout the country. The municipal level of government is responsible, according to Article 115 of the Federal Constitution, for the administration of its treasury, which embraces all the revenues that come from its own goods, taxes, fees, and other revenues approved by the state legislature. Municipalities also get monies from both federal and state revenue-sharing.

Paragraph "a" of the aforementioned article provides that each municipality collect taxes on real estate, as approved by its state legislature. Of these, the main taxes are property tax, sales tax, value-capture tax (impuesto a la plusvalia) and location tax (impuesto de radicacion); however, the first two are important both in terms of revenue collection and geographical extent, while the other two are not significant sources of income and only few states include them in their fiscal codes. [1] Most municipalities use the combined value of land and improvements as their property tax base--i.e., the method known in some countries as "composite rating," or "flat rating." The only exception is the municipalities of the states of Baja California and Baja California Sur, where a property tax based solely on land-values is in operation.

Before 1983, the municipalities left state governments in control of their treasuries. However, in that year, a constitutional amendment was introduced to give the municipal governments more powers to organize their own finances. Since then, important changes have occurred in relation to local finances and the administration of taxes levied on real estate property. The first years were difficult. For reasons cited in the next section, revenues coming from real estate taxes fell off dramatically, as did local revenues in general. Municipalities relied basically on state and federal revenue-sharing. That situation improved during the 1990s, when a large number of municipalities were able to raise their own funds, particularly those stemming from real estate, which have become a very important source of total revenue. Other local governments, however, were not as successful, and encountered enormous difficulties in attempting to reform their cadastre systems, update values, improve collection methods, and persu ade citizens to accept tax increases. [2]

The present chapter documents the experience of a successful property tax reform that was carried out during that decade in Mexicali, a city of nearly 527,000 inhabitants, which is the capital of the border state of Baja California. [3] This is a very interesting and unique case within the national context because Mexicali was the first municipality in the country to apply a land-value tax--an example that later spread to other cities in Baja California and then into the neighboring state of Baja California Sur.

I

Implementing Land-Value Taxation in Mexicali

AS MENTIONED EARLIER, accomplishing property tax reform did not always seem to be an easy task in Mexicali or anywhere in Mexico. Since 1983, the local level of government has been responsible for setting up and collecting property taxes, although state authorities kept certain responsibilities. However, property tax revenues, and local revenues in general, experienced a severe drop caused by a combination of high inflation rates, economic recession, lack of political interest, and reduced administrative competence of local governments, which preferred to rely on revenue-sharing sources. The drop in property tax revenues began prior to the 1983 reform, and they remained at the same level for some four years after it had been instituted.

In the early 1990s, a clear improvement in the nation's macroeconomic performance made conditions more favorable for change, although political and technical factors reduced the incentives for many state and local governments to embark on fiscal reform. Nevertheless, the federal administration of Carlos Salinas de Gortari (1989-1994) launched a program to improve local finances, basically through a cadastre modernization program lead by BANOBRAS (Banco Nacional de Obras y Servicios), a public development bank. The results have been noticeable in terms of property tax revenues (Figure 1).

Even before this program and other national policies began to exert an influence on local and state administrations, Mexicali took the lead in property tax reform. Starting in 1989, the newly elected mayor, Milton Castellanos Gout, saw the importance of having strong local finances, and he wanted to raise revenues at the beginning of his term. [4] He hired a private consulting firm to update cadastral values. The main consultant, Sergio Flores Pena, a graduate in city and regional planning from the University of California at Berkeley, was a convinced believer in the fairness, equity and efficiency of land-value taxation, and convinced the mayor to change from a mixed land-and-building-value tax base to a land-value system, and also to design a mathematical model to calculate land values.