Colombia leader asks tax hike to offset oil dip, peace costs

Markets Associated Press

Colombia's government is seeking to raise taxes to offset a plunge in oil revenue and an ambitious spending program to end a half century conflict with leftist rebels.

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Low oil prices have been driving a hole in Colombia's public finances ever since the price of crude began collapsing in 2014. But President Juan Manuel Santos, winner of this year's Nobel Peace prize, had put off presenting his tax reform for months for fear of alienating voters ahead of a referendum on a peace deal with the Revolutionary Armed Forces of Colombia.

Voters narrowly rejected the deal this month anyway, delivering a major blow to Santos' efforts to bring an end to the bloody conflict.

But even as the peace deal hangs by a thread the need for additional funding hasn't gone away. Facing a deadline to pass the tax hike for it to take effect next year, Santos presented his proposal Wednesday night to congress, where it was met with hostility even by lawmakers who are strong backers of the president's peace drive. Regular Colombians, who blame Santos for neglecting the economy while focusing squarely on peace, also expressed outrage.

"It's a profoundly regressive tax reform intended to punish all the people, and the popular and middle classes, while favoring transnationals," said Senator Jorge Robledo of the leftist Democratic Pole party.

The most controversial aspect is a 3 percentage point hike in sales tax to 19 percent, which taken together with the elimination of a wealth tax on the rich, has subjected Santos to criticism he's putting too big of a financial burden on the poor. Finance Minister Mauricio Cardenas' plan also includes levies on soft drinks and lowering the income threshold for filing a tax return.

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Analysts say the polarized political environment will make passing the reform, at least in its current form, harder.

Colombia, which saw oil production almost double over the past eight years, is one of the countries hardest hit by a plunge in oil prices from a high of over $100 per barrel in 2014 to as low as $35 earlier this year. In 2013, almost 20 percent of public spending was funded by taxes and dividends from state-run producer Ecopetrol but this year oil income will be nil, putting at risk the country's sterling investment-grade credit rating.