SECRET MEETINGS, DEAL-MAKING, TAXES, AND CAFTA-DR

UNCLAS SECTION 01 OF 02 SAN JOSE 001774

SIPDIS

SENSITIVE

WHA/CEN
EB FOR WCRAFT
E FOR TSMITHAM
WHA FOR WMIELE
WHA/EPSC FOR KURS
H FOR JHAGAN
STATE PASS TO USTR FOR JYOUNG, CPADILLA, AMALITO

E.O. 12958: N/A
TAGS: ETRD ECPS ECON PREL PGOV SOCI CS
SUBJECT: SECRET MEETINGS, DEAL-MAKING, TAXES, AND CAFTA-DR
IN COSTA RICA

REF: (A) SAN JOSE 01455


1. (U) Summary. On August 3, 2005 Costa Rican dailies "La
Prensa Libre" and "Diario Extra" reported that members of
President Pacheco's Social Christian Union Party (PUSC) and
the National Liberation Party (PLN) met in secret on July
29, 2005 to discuss overcoming difficulties in passing the
Fiscal Reform bill. President Pacheco continues to require
passage of the Fiscal Reform bill prior to sending the
United States-Central American-Dominican Republic Free
Trade Agreement (CAFTA-DR) to the Legislative Assembly. In
a different venue, a key PUSC party member tested the
waters of how strongly the Libertarian Movement Party (ML)
deputies want to ratify CAFTA-DR by proposing a deal
involving removing numerous ML-proposed amendments to the
Fiscal Reform bill in exchange for sending the trade
agreement to the Assembly. These two actions are
significant in that they are unusual for Costa Rican
politics and show just how contentious the debate
surrounding all CAFTA-DR-related issues has become. End
Summary.


2. (U) Oscar Arias (PLN),the current front-runner in the
February Presidential election, and Ricardo Toledo, the
PUSC Presidential candidate, as well as other senior PLN
and PUSC Assembly members (deputies) attended the meeting.
Laura Chinchilla (PLN),a possible Arias running mate in
the upcoming February 2006 presidential elections, hosted
the meeting at her house. The purpose of the gathering was
to allow the PLN party members to urge PUSC deputies to
identify their issues with the bill and to prod them into
supporting it. The Fiscal Reform bill, although under a
"fast track" review, has gone nowhere fast, in part, due to
heavy opposition from the President's own party (Reftel).
[COMMENT: This is an odd situation in that the
"opposition" PLN is in the role of trying to convince the
President's own party members (PUSC) to support the
Administration's self-proclaimed top priority. President
Pacheco has not deigned to call legislators to lobby
himself for the bill. END COMMENT.]


3. (U) Together, the two parties' deputies, should they
decide to support it, number more than the minimum 29
necessary to pass the bill. Reportedly, the PLN leaders
requested that the PUSC deputies cease the political
rhetoric regarding opposition to Fiscal Reform and clearly
define their issues and identify what changes would be
necessary to win their votes. Some of the PUSC deputies,
including the Assembly President Gerardo Gonzalez do not
support the bill because they state that it does not
benefit the poor and does not ensure that rich Costa Ricans
will pay their fair share. One of the issues is that of
exempting taxation of income earned outside of Costa Rica.
They state that this would unfairly benefit the rich Costa
Ricans at the expense of the poor. However, it is
uncertain if this is the only issue because, as a voting
block, the PUSC deputies have not clearly expressed why
they oppose the bill.


4. (U) Arias reportedly talked to the PUSC deputies of the
need to be consistent and sincere and to avoid having the
Assembly put in an impossible position. Gonzalez's very
public opposition to the Fiscal Reform bill was
specifically mentioned. Arias and his fellow party members
complained that Gonzalez, as president of the Assembly,
promised to lengthen and devote Assembly sessions to
discuss the Fiscal Reform bill, but he has failed to follow
through on that promise. Mario Redondo (PUSC) stated that
he would look for consensus in his own party and hopes to
find common ground with President Pacheco's Administration
and the PLN.


5. (U) Other than the PUSC and PLN factions, the rest of
the deputies who make up the 57-member Assembly are from
several smaller parties with the third-largest contingent,
that of the Citizens' Action Party (PAC),having 8
deputies. Of note are the 5 Libertarian Movement Party
(ML) deputies who have historically stonewalled passage of
some bills by introducing hundreds of amendments that by
rule must be discussed, effectively killing the bills.
Since being introduced three years ago, consensus has
proven illusive on the Fiscal Reform bill. On May 23,
2005, the Assembly voted 38 to 19 to invoke the new "fast-
track" review of the bill, the first time using this
procedure. On the first and only day of debate, the ML
deputies proposed more than 1000 amendments in an attempt
to kill the bill (even with the fast-track review, all of
the amendments would need to be discussed and would result
in hundreds of hours of delay in voting for the bill).
Other changes made by the Administration, mostly exempting
special interests from paying taxes, have resulted in a
decrease of support of the current bill and have brought
the Assembly to the current impasse. [COMMENT: The ML
party strongly supports CAFTA-DR, but vehemently opposes
fiscal reform because it will cause a tax increase. END
COMMENT.]


6. (U) President Pacheco supports the bill in its current
form, and he is using the issue of sending CAFTA-DR to the
Assembly as leverage to assist its passage. Due to his
fears of strikes and violent demonstrations, he also is
using this strategy to avoid sending CAFTA-DR to the
Assembly during his administration. Finance Minister
Federico Carrillo has stated that passage of this bill is
necessary to ensure long-term fiscal stability of the
country. In response to PUSC deputies' opposition to the
issue of taxes on income earned outside of the country, on
August 4, 2005, the Administration proposed to introduce
changes to the bill that would require a resident to pay
taxes on income earned outside of Costa Rica only if the
income actually enters Costa Rican territory. [COMMENT:
Other contentious issues still exist and it is unclear if
this will satisfy enough deputies to approve the bill. END
COMMENT.]

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DEAL MAKING - REMOVAL OF PROPOSED AMENDMENTS TO THE FISCAL
REFORM BILL FOR SENDING CAFTA-DR TO THE ASSEMBLY?
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7. (U) The numerous amendments proposed by the ML
deputies, even under the "fast track" review, would require
many hours of discussion and delay. In response to this,
the Chair of the Assembly's Mixed Commission responsible
for reviewing the Fiscal Reform bill, Mario Redondo of the
PUSC, proposed a deal with the ML deputies -- to send CAFTA-
DR to the Assembly after the ML deputies withdraw some or
all of their more-than-1000 proposed amendments to the
Fiscal Reform bill. The ML deputy Federico Malavassi
stated "We are not going to give in to such a ruse from
this guy ... this is extortion, and there is no way that
our deputies are going to accept it." [COMMENT: It is
highly unlikely that the Assembly or any member of the
Assembly has the power under the constitution to submit a
treaty for ratification. Most constitutional scholars
believe that only the President can do that. END COMMENT.]

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COMMENT
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8. (SBU) The two largest factions in the Assembly
discussing a very important issue such as Fiscal Reform is
certainly a good thing. However, the fact that these party
leaders felt that they had to do this in secret and outside
of the Assembly is a sign of the contentiousness of this
issue. The Fiscal Reform Bill, in its current form, has an
uphill battle to be approved. In the three years that it
has been under discussion, it has made little progress, and
the adoption of the so-called "fast-track" review of the
bill has done little to speed its passage. Knowing that
President Pacheco has placed this bill in the path to CAFTA-
DR ratification, some deputies may be using this issue as a
means to avoid even discussing CAFTA-DR. The unusual nature
of the discussions and the aforementioned deal proposed by
Redondo shows the desperation of the political situation
surrounding this issue.
KAPLAN