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Government Stability/Investment Profile
Tax Reform Stalls Again

Over the last decade, four successive presidents have attempted to implement tax reforms that are seen as essential to creating a basis for long-term fiscal stability, only to see their efforts stymied by the lack of a reliable legislative majority and the ease with which even a tiny bloc of lawmakers can stall bills using procedural maneuvers.  The long struggle to reform the tax code appeared to be finally heading for successful conclusion in September 2011, when opposition leader Otton Solis, the head of the Citizen Action Party (PAC), reached an agreement with President Laura Chinchilla and the governing National Liberation Party (PLN) under which the measures would be granted fast-track status.  By limiting debate on the measures, the assumption was that the tax package could be approved in time to implement the changes in January 2012.

Unfortunately, that timetable proved to be much too optimistic.  Although the time allotted for debate is limited under the fast-track rules, each proposed amendment must be debated—no matter how long the odds that it might actually be approved—and opponents of the tax reforms have submitted thousands of amendments.  As a result, the first of two required votes in the Legislative Assembly was delayed until mid-March 2012.

As expected, the tax package was approved with the backing of lawmakers from the PLN, the PAC, and the lone representative of the National Restoration (RN) party.  Unfortunately, a second vote is unlikely to be held anytime soon.  Luis Fishman, the leader of the opposition Social Christian Unity Party (PUSC) has challenged the constitutionality of the fast-track procedure, and his complaint is currently being deliberated by members of the Constitutional Chamber of the Supreme Court (Sala IV).  The magistrates have prohibited a final vote until they deliver their verdict, which, based on past experience, might not happen until next year.

Even if the Sala IV were to return a quick ruling in the government’s favor, it is an open question whether Chinchilla would be able to count on securing majority support in a second legislative vote.  As the process has dragged on, popular opinion of the tax measures has become increasingly negative.  Poll results recently published in La Nacion revealed that 75% of voters who claimed to be informed about the tax changes opposed them.  Significantly, opposition was strongest among those identifying themselves as supporters of the PAC, a fact that is unlikely to go unnoticed by Solis and his party colleagues.

Meanwhile, Chinchilla’s approval rating has fallen to 23%, compared to the 47% vote share she won in the 2010 presidential election.  As the president is not eligible to stand for re-election in February 2014, she will inevitably confront a breakdown in discipline within the PLN as her would-be successors begin to jockey for position.  That process will start early if her approval rating does not recover in the coming months, and the prospects on that front are not bright.  Consequently, it cannot be taken for granted that Chinchilla will be able to count on the backing of her own party in a second vote on the tax measures.  She has conceded that there is little chance that the reforms will be approved during her term if the holding of a second vote is delayed beyond the end of 2012, but it is quite probable that the window of opportunity will close much sooner than that.


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