Working Papers

Tax Efforts in the Mexican States

AUTHOR(s): Bonet, Jaime , Rueda, Fabio
PUBLISHED: March 2012


Given the high dependence on transfers from the federal government, it has traditionally been argued that there reigns a low fiscal effort among the Mexican states. This is a partial approach as a comprehensive assessment of the fiscal performance must be associated to its tributary potential in order to establish whether the administration fittingly leverages its tax-collecting capacity. By applying two methodological proposals to consider the state’s fiscal effort, the Tax Effort Rate (TER) and the Fiscal Potential Usage Rate (FPUR), this article advances in the calculation of the tax effort throughout the Mexican states. In addition, by using panel models, it evaluates the factors that explain the differing fiscal efforts between states. The results show that the approach followed to estimate the tax effort affects the assessment of the inter-state tax management disparity. While the output level per capita, the degree of labor informality and the political affiliation of the governor explain the horizontal imbalances of the FPUR, the transfers determine the TER. The comparison of expected and actual collection of the main generator of tax revenue in the states, the payroll tax, indicates that, in added terms, the tax-collecting effort is close to its potential and, thus, there is limited fiscal room to increase the collection of this duty. A greater state tax effort should focus on the other taxes which fall under their management as well as on exploiting the delegation of certain taxes imposed by the federal government.

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