Mexican license plates are common in parking lots of shopping malls in U.S. border cities. They will be even more familiar after Mexico raises its federal sales tax in border regions to match the rest of the country, say merchants and shoppers.
The increase to 16 percent from 11 percent, which takes effect Wednesday, has sparked large protests on the Mexican side of the border. Facebook pages with secessionist tones have generated about 200,000 “likes.” Thousands have signed petitions to challenge the tax hike in court.
The Mexican government says the two-tiered tax structure, which was introduced decades ago to make border cities competitive, is no longer justified. Others say the increase may backfire by driving more shoppers north of the border, harming the economy and raising less tax revenue than anticipated.
“We don’t compete against the rest of Mexico, we compete against the American economy,” said Juan Manuel Hernandez, president of the Tijuana Business Coordinating Council, an umbrella group of business chambers.
U.S. border regions like California’s Imperial Valley – which has three Wal-Mart Supercenters and only 175,000 residents – have long depended on Mexican shoppers who buy everything from gasoline to groceries. Brand-name clothing and electronics are perennial draws for Mexicans seeking products that are more expensive or hard to find south of the border.
Mexican shoppers spend more than $4.5 billion a year in Texas border cities, according to the Federal Reserve Bank of Dallas. Fed economists estimated in March that Mexican border crossers account for 58 percent of retail sales in Laredo and 42 percent in McAllen.
Published research is more dated for other border states, but the impact is undeniable. University of Arizona researchers concluded that Mexican shoppers accounted for 48.6 percent of taxable sales in Santa Cruz County, Ariz., which includes Nogales, from July 2007 through June 2008.
Thomas Fullerton, an economics professor at University of Texas at El Paso, estimates the tax hike will cause Mexican shoppers to spend between 5 percent and 10 percent more on the U.S. side of the border in 2014. Smaller cities like Douglas, Ariz., and Calexico, Calif., are expected to feel it more than San Diego and El Paso, which have more diverse economies.
U.S. businesses will benefit less in later years as Mexicans adjust to higher taxes, said Fullerton, who has studied how changes in the Mexican economy affect retail sales in El Paso.
The tax increase, which the government of Mexican President Enrique Pena Nieto estimates will raise $1.15 billion a year, is part of a package of fiscal measures that also raises taxes on businesses and top-end wage earners, ends some deductions and introduces a tax on junk food.
Pena Nieto’s administration says border businesses haven’t shared savings from lower sales taxes with consumers. It found consumer goods were 4 percent higher than in the rest of the country and noted that other countries and states within the U.S. don’t allow lower sales taxes for business on their borders.
Hernandez and business leaders from other border states challenged those findings at a meeting with Treasury Secretary Luis Videgaray in Mexico City in October, showing results of their own survey of a basket of consumer goods that found prices in San Diego were 4 percent lower than Tijuana and 37 percent lower than Mexico City. They offered studies predicting dire economic consequences.
The secretary didn’t argue with the studies, according to Hernandez, but asked what would happen if businesses absorbed the impact or shared the hit with consumers. The discussions went nowhere.
The tax increase spawned Facebook pages with renegade slogans for Mexican border states. “Republic of Baja California” has 140,000 likes, and “Republic of Chihuahua” has 36,000 likes.
About 2,500 shoppers signed a petition the weekend before Christmas at a Tijuana shopping mall to seek an injunction against the tax increase, Hernandez said. The Tijuana business group is leading an effort in Mexican border states to submit tens of thousands of signatures to a federal court in Tijuana in early February.
“It’s necessary to speak up because the border needs to be able to compete,” said Esteban Elias, 44, a Tijuana auto mechanic who signed the petition and buys groceries and clothing in the San Diego suburb of Chula Vista.
Until recently, Elias, like millions living in Mexican border regions, went to the U.S. on a “border crossing card,” which allows quick visits within short distances of the border. Since his card expired, he places orders through others. Other Mexican shoppers are U.S. citizens or legal residents.
Some speculate that Mexican customs officials will step up inspections on returning shoppers, discouraging cross-border jaunts. Purchases are duty-free up to $300 a person during the winter holiday season, but many shoppers flout the rules.
Still, U.S. business leaders are geared for a sales bump.
“This tax increase gives Mexican nationals an excuse to shop and spend money on the U.S. side,” said Steve Ahlenius, president of the McAllen Chamber of Commerce.