Death and taxes: Federal transfers fuel violence in Mexico

As organized criminal activity has spiraled out of control in Mexico, two federal administrations have been unable to regain control entirely. At least, there is increasing awareness that Mexico’s national institutions cannot solve the problem. However, there is little discussion as to why our organizations at the state and local levels are ineffective at enforcing the rule of law. The importance of Mexican fiscal federalism in this explosion of criminal behavior is notably underemphasized. It is critical for the national security of both Mexico and the United States to understand this relationship.

In his study of the formation of European states, the American sociologist and political scientist Charles Tilly recognized the vital role of taxation in the organization and capacity of government. Countries that had easy access to overseas funds, such as Spain in the early 17th century, grew increasingly fragile because they were never forced to develop the ability to extract revenue from their populations — a function that has turned into the backbone of modern bureaucracies.

{mosads}Additionally, governments dependent on external income became less democratic, because they lacked financial accountability to their citizenry. Consequently, Tilly’s theories make it increasingly clear that, while there is no order without the State, there is no robust State without taxation.

When governments are weak, other power structures begin to fill the void. There is a middle ground between a capable State and chaotic natural anarchy: organized crime. Bands, cartels and crime networks can quickly start to function as pseudo-governments. They professionalize violence and sell protection from it, all without the accountability structures of a healthy democratic State.

An examination of Mexico’s tax policy is essential to understanding the recent proliferation of criminal activity. In a country with a vast and fragmented territory, this is especially true of state and municipal rule. No matter the size and sophistication of Mexico’s federal bureaucracy, it will always be insufficient to administer justice and social policy on its own properly. Mexico’s current system prevents the states’ access to revenue collection, and the bureaucratic development that taxation enables.

According to Moody’s, the average Mexican state collects only 10 percent of its income. The other 90 percent of the states’ budgets comes in the form of federal government transfers. A former head of our secretary of the Treasury’s Unit for Coordination with the States claims that municipalities account for only 1.1 percent of Mexico’s tax revenues.

By comparison, U.S. states collect 28 percent of the country’s total revenues, while local governments gather around 11 percent, according to the Tax Policy Center. This disparity is unsurprising, given that the Mexican states are severely limited in the types of taxes they can impose. The lack of a robust bureaucratic revenue collection system handicaps the states’ ability to perform their other governmental duties. And, expectedly, organized criminal organizations increasingly are filling the void.

The Mexican government is not blind to these concerns, and the secretary of the Treasury has tried, with little success, to incentivize the states’ tax collection through matching funds. More significant, structural changes are required. Mexico’s constitution gives states little leeway to develop their systems of taxation; they lack the authority to levy income or sales tax.

This fiscal arrangement is the basis of Mexico’s current political equilibrium. Governors operate detached from the people who elect them. And, despite its leverage over states’ finances, the federal government is unable to keep the corruption in check. Although citizens benefit from the decreased tax burden, they end up saddled with terrible governance and increasing graft at the state level.

Admittedly, this framework leads to some discouraging conclusions: this isn’t the type of problem that a single new federal administration can fix. Building capacity at the state and local levels will be a complicated, multi-year endeavor without visible short-run results. Moreover, such a transformation would require a meaningful amount of political capital and stakeholder bargaining.

Mexicans are used to magical thinking when it comes to public policy. We tend to think that merely reforming laws will translate into real changes. But it’s time to face the facts: no single bill or candidate and no military intervention will be able to solve the problem permanently.

However, there are concrete steps Mexicans can take. We can work with municipalities and states to identify opportunities for changes in tax policy, and any new resources granted to the states should go through the existing matching program. Most importantly, we can start by honestly confronting the real nature of our problems.

Roberto Velasco-Alvarez, a lawyer based in Washington, has over a decade of experience in the Mexican federal, state and local public sector. Follow him on Twitter @r_velascoa.