THE United States-Mexican border is about to be affected by a
sharp economic jolt with or without the North American Free Trade
Agreement (NAFTA). In the border states, US federal power since
World War II is most visible in US military spending, principally
in aerospace, military bases, and shipyards. In the 1980s more than
25 percent of domestic contractor and salary budgets of the
Department of Defense (DOD) were centered in the four states
bordering Mexico. With the end of the cold war and the
corresponding closure of military bases and reduction in
procurement from military contractors, the US-Mexican border states
will be affected sharply.
Five decades of military spending in the US border states have
covered over the two principal weaknesses of the US-Mexican border
economy. The first is an underfunded public infrastructure,
especially on the Mexican side, in areas such as public health,
housing, transportation, water supplies, sewage treatment,
environmental controls, and education. The second, which is partly
responsible for the underfunded infrastructure, is the lack of
viable tax policies for the border region.
The inadequate infrastructure can easily be seen by a day's trip
to any border town - and it's not necessary to cross the border to
get the point. The inadequacies of the tax system, however, are
invisible to the field observer. On the US side, no border tax is
earmarked for infrastructure at either the state or federal level.
Those parties using the border for trade and investment do not pay
for the border services and resources they consume.
Consider a maquiladora assembly plant in Cuidad Juarez. This
plant, consumes infrastructure and services on the US side in El
Paso, Texas. The plant assembles a television set (more likely in
Tijuana, Mexico than in El Paso) made principally with components
manufactured in the Far East. The assembled product crosses the
border, paying duty only on the value added by assembly labor.
There is no duty on the value added by the infrastructure of the
border communities. Worse, the real market value of the assembled
product is taxed in the state where the wholesale profits are
booked, typically not one of the four US border states. In this way
the Industrial Belt, from Minnesota to Connecticut, receives
value-added from border infrastructure without paying tax
contributions toward the maintenance or upgrading of that
infrastructure. This structural problem was one that the border
states could overlook when their economies were bolstered by
The tax problem on Mexico's side of the border is entirely
different. The Mexican government runs by a strictly centralistic
fiscal, administrative, and political system. As a result, all
taxes flow to Mexico City and are redistributed at the state and
municipal level. At the local level there are a few pennies of
property taxes but no state or municipal income taxes. As a result,
Mexican states are fiscal agents of federal budgets and priorities.
In 1993, some 2,000 maquiladoras employ roughly 500,000 assembly
workers. They would be a great boon to the border economy if they
paid taxes based on some meaningful measure of the productivity of
the plant, such as true profitability, and if their tax
contributions were to remain in the border region and not disappear
in the black fiscal hole that is Mexico City.
If NAFTA is implemented, the maquiladoras will argue that their
tax-exempt status should be grandfathered. It would be in the best
interest of the border region to have maquiladoras pay real taxes
on profits. (They currently only pay a tiny housing tax calculated
as a percentage of the wage bill.) In this way the maquiladoras
would cease being economic placebos for the border region.
NAFTA, however, is silent on such seemingly secondary matters of
corporate and regional tax policy. …