January 6, 2014

Price increases and mysterious changes to the new tax law

Honduran news is announcing price increases right and left due to the modest increase in minimum wage, electricity increases, and the massive new tax law which includes an additional 3% sales tax (for a total of 15%), income tax increases, fuel tax increases, loss of import duty and tax exonerations as well as new taxes on many previously tax-free items.

Minimum wage

The legal minimum wage varies based on the size of the business (number of employees) and the category of industry. In businesses with 1-50 employees the increase will be 5%. For businesses with 51-150 employees, the increase will be 6% and for businesses with more than 150 employees, the increase will be 7.5%. Slightly larger minimum wage increases were also set in advance for 2015 and 2016.

As a middle of the road example, the wage for category 7 (retail, hotel, and restaurant workers) in businesses with 11-50 employees will be about L.7,300/month in 2014 (~US $354/month) or L.243 per day (~US $11.80/day), or slightly less than US $1.50 per hour. Three exceptions are agricultural workers, maquila (factory) workers, and those in special "regional" zones who will earn much less. I'll be posting another, more detailed article about minimum wage in the next few days.

Nacer en Honduras has the Ministerio de Trabajo tables (complete with obvious typos) posted here. I haven't been able to find a copy of the law posted online yet – not even on the Ministerio de Trabajo website – but hopefully the typos were corrected in the final published version.

The 5% increase in 2014 minimum wage was already eaten up by a 4.92% inflation rate during 2013. Interestingly, the negotiated increase in minimum wage was announced just one day prior to the new tax law being passed. That makes me think that discussion of the tax law was purposely delayed until wage negotiations between government, business, and union representatives were finalized. Workers' finances will be going backwards after the rest of the price increases go into effect.

Announced price increases

The electric increase which was originally estimated at 5-9% is now being mentioned to be possibly as high as 15%. The government-run monopoly closed 2013 with a deficit of L.5 billion.

The additional 3% sales tax went into effect Friday.

Government set fuel prices for this week were announced on Saturday. Super gasoline outside of San Pedro will cost just a hair under L.100/gallon (~US $4.85). Regular gas will now be L. 92.16/gallon (~US $4.47) and diesel 90.80 (~US $4.40), or higher in other locations. A 25-pound cylinder of LPG, which most families use for cooking, has increased from L.276.48 to L.290.35 (~US $14.10).

Transportista associations have announced that due to the rise in fuel costs, increases of bus fares are inevitable. In Tegucigalpa, they estimate that yellow bus fares will increase from L. 4 to L. 7 while executive and rapiditos will increase from L. 10 to L. 13. San Pedro transportistas are asking the government for increases of L.2-5 per passenger. Taxis will no doubt have to increase their fares as well. Transportation increases alone will eat up most of the average L.240/month minimum wage increase.

Tigo cable TV is announcing an average 10% increase starting in January. It's not clear yet whether this increase includes the new sales tax on cable TV or whether sales tax will be added to the increased price, too. In much of the country, the only way to get more than 2-3 channels or even any channels in some areas is by cable or satellite.

Beef producers predicted large increases in prices. One beef producer stated that 70-80% of the meat consumed in Honduras is imported and will face an increase of at least L. 8 per pound, while meat produced nationally will face an increase of at least L.5-6 per pound.

In the agricultural fair in Tegucigalpa last weekend, prices of various vegetables, including lettuce, potatoes, pataste, cucumber, and chiles, were already increased about 20%. Pork leg, which is very popular during the holidays, rose from L.42 per pound to L.44. Most other prices remained stable but that will likely change beginning this month.

Fees for water service in San Pedro were increased on January 1 based on the official annual inflation rate announced by Banco Central Honduras, however, another increase will be announced on January 15 based on increased operating and administrative costs.

The new private port operator taking over in Puerto Cortés, the largest commercial port in Honduras and Central America, will announce new increased tariffs next week which will increase the cost of all imports and exports. However, it is expected that the port will be operated more efficiently and suffer much less from fraud and corruption than it did under ENP, the government agency previously in charge of the port.

A 42.5 kg. bag of cement will increase between L. 11 and L. 13. The price increase will hurt the construction industry as well as price many potential new home buyers out of the market. Ebal Díaz, right-hand man of newly elected president Juan Orlando Hernández, pointed out that cement is tax free so the large price increase is totally uncalled for in his opinion. However, on January 6, 2012, the price of cement was fixed by law at L.142 for two years so considering inflation and increased wage and transportation costs, the price increase may be justified. (Note: Cement is not tax free and never has been so I don't know what Ebal Díaz was referring to. It may be that cement producers are exempt from income tax or it may just be that he didn't know what he was talking about.)

The cost to build a vivienda social (the least expensive type of house) is estimated to increase approximately L.30,000 based on a simple house valued at about L.450,000 (~US $21,850). The current housing deficit in Honduras is estimated at about 400,000 (families who have no house at all) plus about 200,000 which need improvements, by which I'm sure they mean basic improvements to make the home safe and livable, not luxuries like running water and electricity.

Expert opinions

Wilfredo Cerrato, Minister of Finance, reminded people that markets, pulperías, and small businesses whose sales don't exceed L. 700,000 per year (~US $34,000) are exempt from charging sales tax. (Another article in the same newspaper quoted him as saying L.180,000 per year (~US $8,800) so I'm confused.) He also claimed that businessmen are taking advantage of the new tax law to announce "brutal and disproportionate" price increases. Since the government's entire income tax base is only about 70,000 taxpayers (of a population of ~8.5 million!), it seems that income tax increases would not have such a great impact on prices. The increase in wages, fuel, and electricity costs and the increase in sales tax, however, will affect most everyone. The government should have anticipated across the board increases in prices.

Ebal Díaz also announced that one of the laws to be considered by the lame duck congress this week (read 'railroaded through'!) will be a law to provide for criminal action against tax defrauders. Now that is an innovative concept! I wonder why no one ever thought about doing that before? Someone should alert the IRS to look into this. Despite my sarcasm, this is an excellent idea – If  it is ever enforced, which it probably won't be toward the worst offenders. The first time someone goes to prison for tax evasion, evasion will probably decrease by 50%.

Economic experts predict the tax law will adversely affect economic growth and increase inflation. Additionally, they lament that the poor will be most affected by the changes. Various organizations have announced proposed legal measures to reverse the law.

Most commentators, including Cardinal Óscar Rodríguez, say that tax increases are necessary for Honduras to survive, but that the government needs to do more to reduce government costs, to fight corruption, and to collect taxes instead of expecting the poor and middle class to make up the difference for government's failures. High among the list of demands is more transparency and accountability for the special funds these new taxes will go into. In 2013, the original national budget was L.76.5 billion, but the actual spent by the government was L.131.7 billion, almost double!

Unauthorized changes in tax law

In one of those 'only in Honduras' moments, when the new tax was published in La Gaceta, it had been illegally changed somewhere between congress approving it, congress' style committee editing the wording, the president signing it into law, and La Gaceta publishing the official version. This isn't the first time this has happened, and like previous times, no one claims to know who made the changes or why it was changed, and it doesn't appear that any investigation will be performed to find out.

I haven't had a chance to compare the entire law paragraph by paragraph with the draft approved by congress, but in one bit of good news, the law was changed to exempt from sales tax 72 food items, increased from the 35 items originally approved by congress. Among the additions are many of the most commonly eaten fruit and vegetable items, so we won't be seeing those contraband carrots and broccoli sold on dark street corners that I had imagined. Another sensible exemption from sales tax is purified water in plastic bags up to 8 ounces and in 5-gallon bottles; apparently smaller bottles will be taxed. Additional types of bread, cookies, and saltine crackers were also added to the exempt list, though whole grain, multi-grain, and 'light' bread, among others, will still be taxed. With the exception of meat items, the tax-free list now includes the majority of foods commonly consumed by the poor and middle class.

It will be interesting to see if any new income tax exemptions slipped through in the final version.

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