Federal Funds Should Be Distributed According to GDP: GOAN

Diego Sinhue, Governor of Guanajuato, asked on behalf of the Association of Governors of National Action (GOAN) to modify the current scheme through which the federal government assigns resources to each state. The proposal suggests changing the current formula of the fiscal coordination law so that funds that states receive from the federation are based on their contribution to the national GDP. The proposal was supported by the governments of Quintana Roo, Durango, Baja California Sur, Aguascalientes,Yucatan, Chihuahua, Queretaro and Tamaulipas.

States’ total income depends on two elements: their own income and transfers from the federal government. Notably, federal entities generate only 12 percent of their income, while 88 percent of their resources come from the fiscal coordination agreement with the federation, according to IMCO. In addition, state taxes only represent 4.7 percent of the country's total collection, while the federal government collects 93.6 percent, the rest comes from other taxes. "The current fiscal coordination regime between the federation and sub-national governments generates a complicated scenario for the federal entities, since they have little fiscal autonomy, high dependence on federal transfers and low collection,” explains IMCO.

Mexico City is the federal entity that contributes the most to federal tax collection, with 46.2 percent of the total, followed by Nuevo Leon with 8.5 percent, Tamaulipas with 7.7 percent and Veracruz with 7.5 percent, according to the Center for Economic and Budgetary Research (CIEP). Likewise, Mexico City is the state with the highest tax collection rate against the state’s total income. In 2018 alone, the state raised MX$67 billion (US$3 billion), representing 37 percent of its total revenue, according to IMCO’s and Mexico City authorities’ data.

Likewise, INEGI reported that the states that contribute less with taxes are Tlaxcala, Nayarit and Durango with 0.1 percent; Guerrero, Zacatecas and Oaxaca with 0.2 percent and Chiapas, Baja California Sur, Campeche, Hidalgo and Morelos with 0.3 percent. It should be noted that the states that propose the fiscal change to receive greater transfers from the federation are not those that have the most tax contributions, despite their contribution to GDP. According to INEGI figures, Quintana Roo contributes 0.9 percent, Durango 0.1 percent, Baja California Sur 0.3 percent, Yucatan 0.4 percent, Chihuahua 2.1 percent, Querétaro 1.1 percent, Guanajuato 1.3 percent and only Tamaulipas is in the national top three with 7.7 percent and Aguascalientes close to the national average with 0.7 percent.

If the fiscal regime changed according to GDP contributions, then the most benefited states would be Mexico City (16.4 percent), State of Mexico (8.8 percent), Nuevo Leon (7.6 percent) and Jalisco (7.1 percent), followed by contributions to GDP from Veracruz (4.5 percent), Guanajuato (4.4 percent), Coahuila (3.8 percent), Puebla (3.4 percent), Chihuahua (3.4 percent), Sonora (3.4 percent) and Baja California (3.4 percent). The first four states contribute 40 percent of the total nominal GDP or MX$22 billion (US$980 million) annually, according to data from Mexico’s government.

States need to start raising more and in a better way, instead of suggesting having more transfers from the federation, says IMCO. According to data from the Ministry of Finance in a note by Expansion, the control measures introduced by the federal government last year, such as the tracking of fake invoices, the monitoring of outsourcing and the battle against huachicol, led to revenue for this term hitting a record amount of MX$233.4 billion (US$10.4 billion), the highest number ever. 

Finally, experts emphasize that higher tax collection does not mean higher taxes. According to the Institute for the Technical Development of Public Treasuries (INDETEC), "having an optimal and efficient collection is not a function of the number of taxes that are audited but of tax powers that are not fully exploited," reports a note from The Economist.