State tax collection gains momentum in Mexico

“This increase in own revenues is positive from a credit point of view, since it provides states with greater capacity to fund operating and capital expenditures, while reducing the exposure of their revenues to shocks in federal transfers” , refers to the agency in a report.

“We estimate that, during the next few years, the states will be able to sustain this higher level of their own revenue; however, we do not expect it to change significantly, due to the limitations in the state fiscal framework,” he adds.

In the last three years, seven of the 16 states rated by Moody’s Local Mexico have implemented payroll tax adjustments (ISN).

“For 2023-24, we project that ISN collection will continue to strengthen thanks to favorable labor market conditions in some states, particularly those benefiting from nearshoring,” Moody’s analysis highlighted.

The states have also created new tax figures such as the introduction of ecological taxes, as well as the application of the lodging tax to the services offered by digital platforms, and have implemented more efficient collection policies.

The firm considered that the high rates of informality, low economic growth, weaknesses in the institutional framework and the lack of political incentives are factors that can reduce the collection potential of some entities.

“The increase in own income is a factor that strengthens the credit profile of the states, since it provides a greater capacity to the federal entities to fund operating and capital expenses. The strength in collection also provides flexibility to entities in the face of shocks or temporary delays in the receipt of federal transfers, as has happened in 2023,” explains Moody’s Local.

In the first five months of the year, the observed participations have been 7.1% below the estimate in the budget.

Although we estimate that this lag in participations is temporary, states with a broader revenue base are better positioned to absorb this fall without registering a greater deterioration in their finances, the rating agency said.