The Hat-Tipping Analysis of Mexican States' Revenue

Mexico's states face a revenue challenge, with most heavily reliant on federal funds. A study by IMCO reveals alarming financial opacity, with 88% of states unclear on federal fund usage. Addressing this requires legal reforms, overhauling procurement laws, and tech-driven tax collection.

The Hat-Tipping Analysis of Mexican States' Revenue
A bustling Mexico City street, exemplifying the economic potential yet to be fully tapped by improved revenue collection. Image by Candelario Gomez Lopez from Pixabay

A country's wealth is not just a reflection of its income but also a testament to its public policy decisions. The more a state can generate revenue, both from its sources and from federal allocations, the better positioned it is to offer superior goods and services and ensure wealth redistribution. This is a fundamental principle of governance and economic management. But how does this play out in Mexico?

The Mexican Institute for Competitiveness (IMCO) recently undertook a comprehensive study of the revenue collection and management capacities of Mexico's 32 states. Their findings shed light on some pressing challenges and also offer potential solutions.

The State of Revenue Collection in Mexico

Compared to international standards, Mexico's state revenue collection is alarmingly low. From 2012 to 2021, it averaged just 9.3% of GDP. To put this in perspective, countries with comparable income levels boast a collection rate that's at least two percentage points higher. This gap might seem small, but in the world of public finance, it's a chasm.

The over-reliance on federal revenues is another concern. Barring Mexico City, which generates almost 45% of its revenues, all other states are heavily dependent on the Federation. This ranges from a high of 97.6% in Guerrero to a low of 61.2% in Baja California. On average, a staggering 82.1% of a state's total revenues come from federal transfers, leaving a mere 15.7% as their contribution.

But it's not just about the amount. How these revenues are managed, especially the funds received from the Federation, is equally crucial. And here, the picture is bleak. A whopping 88% of the states, translating to 28 entities, have failed to provide clarity on how they've utilized federal resources. While for many, the ambiguity might be around just 1% or 2% of the funds, the cumulative unaccounted amount stands at a staggering 51,130 million pesos.

This financial opacity and over-dependence on federal revenues hamper states' abilities in three critical areas:

  1. Delivering Quality Services: With limited funds and unclear financial management, the quality of public goods and services inevitably suffers.
  2. Supporting the Vulnerable: Scarce resources mean less support for the most vulnerable sections of society.
  3. Handling External Shocks: A state with weak financial health is ill-equipped to deal with unforeseen economic challenges.
Analyzing data that underscores the urgent need for financial reforms in Mexican states.
Analyzing data that underscores the urgent need for financial reforms in Mexican states.

The Way Forward

Addressing these challenges is no small feat, but IMCO suggests a multipronged approach:

Reform the Legal Framework: A thorough review of fiscal coordination and state taxation powers is needed. The distribution formulas should be revamped to reward states for their revenue collection efforts and should be transparent, progressive, and simple to administer.

Overhaul Procurement and Contracting Laws: The current system, riddled with ambiguities, requires a complete overhaul. Every peso spent from federalized revenues should be accounted for and used efficiently.

Leverage Technology for Better Tax Collection: Property tax, a significant potential revenue source, is currently underutilized. By modernizing and digitizing cadastral systems and clearly defining property rights, states can boost their property tax collections and, in turn, improve basic services.

Mexico stands at a financial crossroads. The current state of revenue collection and management is unsustainable and threatens the well-being of its citizens. However, with the right reforms and a commitment to transparency and efficiency, the country can chart a new course towards financial stability and prosperity. The roadmap is clear; it's time for decisive action.