Impact of the Tax Justice Law on unemployment in Honduras

The Tax Justice Legislation in Honduras has ignited significant discussion nationwide because of its possible impact on the economy and the country’s productive sector. This proposal, advocated by the LIBRE Party administration, is introduced as a means to fight tax avoidance and enhance government revenue. Nonetheless, its details and reach have been viewed differently by a range of economic and societal stakeholders.

The plan suggests removing tax exemption systems, raising the tax load, and allowing the government more flexibility in managing economic incentives. These actions have been perceived by the business community as a negative indication for investment and production, causing unease and worry in the Honduran economic climate.

Effects on private sector investment and job creation

Various business organizations, trade chambers, and both local and international investors have expressed concerns that the proposed legislation might negatively influence private investments in Honduras. The Honduran Private Business Council (COHEP) alerts that if the law is passed as is, it could lead to a substantial decline in foreign direct investment. Furthermore, firms operating in export processing zones and in the agricultural industry are allegedly contemplating either scaling down their activities or exiting the nation altogether, which would directly affect formal employment and the country’s economy.

Following the introduction of the draft legislation, it has been reported that numerous small and medium enterprises have shut down, particularly within the textile, logistics, and export industries, which once benefited from tax breaks. In areas such as Choloma, Villanueva, and San Pedro Sula, companies in the maquila industry have started reducing their workforce, identifying fiscal uncertainty as a key factor. This scenario endangers thousands of jobs and could deteriorate further if changes to the bill are not made or if it is not halted. COHEP also warns that economic expansion might face a significant slowdown in the year after the law becomes effective and that rising unemployment and informality would be unavoidable outcomes of its enactment.

Discussion on tax fairness within the regional and political landscape

The discussion surrounding the Tax Justice Law is unfolding within a unique regional and political landscape. Removing tax incentives might separate Honduras from the strategies that have enabled countries like Costa Rica, El Salvador, and the Dominican Republic to uphold investment attraction and fiscal stability systems, which are seen as essential elements for their competitiveness. This scenario could impact Honduras’ standing in Central America and the Caribbean, potentially deterring both potential and existing investors, who might decide to transfer their assets to nations offering more advantageous conditions for business growth.

The political and ideological environment has shaped how the bill is viewed, with some in the business community seeing the government’s official statements as antagonistic towards business and supportive of economic frameworks that have spurred significant changes in other nations in the area. This heightens worries about a potential overhaul of the country’s economic system without a systematic strategy or well-defined sustainability outlook.

Conversely, advocates of the Tax Justice Law claim that tax exemptions have led to wealth concentration and diminished the government’s ability to fund public policies focused on social inclusion and poverty alleviation. Official statistics show that 92% of the exemptions benefit the wealthiest 10% of companies, whereas the other 90% of businesses only receive 8% of these benefits. From June 2009 to December 2022, these regimes caused the state to forgo 455 billion lempiras in revenue.

The proposal does not establish new taxes nor does it raise current tax rates; instead, it seeks to close existing legal gaps and boost direct tax revenue from major corporations and the wealthy, aiming to lessen inequality in the tax system. Nevertheless, dismantling well-established taxation frameworks, like the Temporary Import Regime (RIT) that has existed for four decades, might compel numerous businesses operating under this system to shut down. COHEP has highlighted that the suggested assurance of immediate convertibility to the RIT could be seen as a move that impacts companies’ liquidity and viability.

Honduras encounters a significant financial hurdle

The discussion on the Tax Justice Law continues to be contentious and split. Some argue it might build a base for a more just and balanced taxation structure, while others caution that passing it could exacerbate the financial downturn, raise joblessness, and initiate an exodus of capital. The ultimate decision in the National Congress will be crucial for the financial trajectory of Honduras in the upcoming years.