President-elect Andrés Manuel López Obrador’s plan to cut the value-added tax (IVA) rate from 16% to 8% near the Mexico-United States border could lead to an economic resurgence in the region, according to experts.
According to the document Nation Project 2018-2024, in addition to establishing a duty-free zone, the López Obrador-led administration will seek to drive economic growth in the northern border region by promoting infrastructure security, the establishment of industrial parks and freedom of movement “in an environment of deregulation.”
Within one to three years, the goals of the project are to capture between $5 billion and $10 billion of the services and retail market in the border region of the United States, regain part of the revenue lost to consumption in the U.S., increase investment as a percentage of the regional GDP by 18% to 24% and attract $5 billion to $10 billion in foreign direct investment.
Carlos Urzúa, the prospective finance secretary in Mexico’s next government, said that the free zone would extend around 30 kilometers south from the border between the two countries, taking in cities such as Tijuana, Mexicali, Ciudad Juárez and Reynosa.
The general director of the Metropolitan Center for Economic and Business Information (Cemdi) said that adoption of the reduced tax rate would translate into families in the area having more money to spend on consumer goods, adding that lower prices would encourage residents to shop at home rather than across the border.
However, the plan to cut the tax rate doesn’t come without risks for the incoming government, which has been eager to show that it will be a prudent economic manager.
Cemdi data shows that halving the IVA in the border region would lead to an annual reduction of tax revenue of 30.3 billion pesos (just under US $1.6 billion) if overall economic growth of 2.2% is maintained.
Cemdi’s Roa Dueñas said that the government would consequently have to make a choice between three different options: finding additional income from other sources, cutting the federal budget or taking on more debt.