PARLIAMENTARY OPPOSITION PUTS TAX REFORM OFF FOR

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 000540 SIPDIS SIPDIS E.O. 12958: DECL: 01/19/2016 TAGS: EFIN ECON PGOV KMPI KTDB JO SUBJECT: PARLIAMENTARY OPPOSITION PUTS TAX REFORM OFF FOR ANOTHER YEAR REF: 05 AMMAN 9954 Classified By: Ambassador David Hale, Reasons 1.4 (b) and (d). ¶1. (SBU) SUMMARY: Jordan's anti-reform parliament dealt a significant, temporary blow to Jordan's economic reform agenda by rejecting a draft income tax law. Parliament was on strong constitutional grounds in doing so, as the bill had been enacted as a temporary law in the waning days of the Badran government, in a clear abuse of the executive's emergency law-making powers. Special interests mobilized to exploit the government's vulnerability, and even the reformers in the new Bakhit cabinet lost enthusiasm for the bill when they learned of several imperfections in the Badran-sponsored legislation. Both the Senate and House voted to rescind the emergency law. (Bowing to the inevitable, Bakhit actually asked for Senate rejection.) Parliament is prohibited from considering a revenue bill during a budget debate, which now has begun and may continue until the end of this parliamentary session, scheduled to conclude March 2006. With parliament scheduled to return no earlier than November, adoption of necessary tax reforms has been delayed for a year. In a country where income tax (personal and corporate) generates less than 6% of total budget expenditures, a step backwards for a tax reform plan to collect more revenues is one Jordan can ill afford. END SUMMARY. ¶2. (C) In the final November days of the Badran government, a number of time-sensitive legislative initiatives were enacted as temporary laws, including a tax reform bill. Parliament was in recess and the King at the time was dead set against bringing parliament back to life, mulling a decision to dissolve parliament and call new elections after a 6-8 month period of electoral reform and campaigning. Persuaded by the post-bombing mood of unity and support, the King allowed legislators to come back into session on December 1, giving parliament a second lease on life. However, the decision to adopt temporary laws has come back to haunt the palace and the new cabinet. Offended by abuse of the executive's temporary law making powers - which stipulate only such laws needed to address true emergencies or urgent spending requirements can be adopted in parliament's absence - law makers are fighting back, as they are now in session and obliged to adopt or rescind the temporary bills. The first test case was the tax reform bill. It was an urgent priority for adoption prior to the budget debate, since parliament is prohibited from considering revenue and spending bill simultaneously, and the budget debate and vote are likely to consume the remaining nine weeks the House is in session. NOTE: If parliament were to pass a budget faster than expected, there is a possibility that the tax bill would be re-introduced in this session, albeit heavily amended. END NOTE. ¶3. (C) The tax law was developed over two years with the help of USAID and contained three main pillars: simplifying tax rates, broadening the tax base, and lowering tax revenue leakage by eliminating narrowly-defined tax exemptions that favor more wealthy tax payers. However, there was a perception that the outgoing Finance Minister made last minute adjustments to the tax rates that diluted some of the reforms, adding fuel to the constitutional fires. Even within the cabinet, leading reformists lost enthusiasm for the law, which in the face of vociferous attacks from the press, special interest groups, and civil society representatives, quickly became an orphan. Instead of launching a communications plan (put in place by a USAID technical assistance program),government officials refused to comment on the law, which was rejected by the Lower House within days. ¶4. (SBU) The public and parliamentary debate threw little light on the merits of tax reform. Op-ed pieces claimed the legislation favored the rich and taxed the poor and middle classes - false charges the government never refuted. For example, the Arabic daily "Al-Arab Al-Yawm" called the tax change "a gift to the rich," formulated by a "minority that does not represent more than two percent of Jordanians." This charge struck home, as many average Jordanians regard the reformists in cabinet - mostly well-off, western educated, private sector leaders - as detached from the common man. A number of professional associations joined in the dissent and the Jordanian Bar Association filed a motion with the Supreme Court to overturn the tax law. AMMAN 00000540 002 OF 002 Disenchantment was also prevalent among public sector employees who lost their 50% tax-exempted income under the new law. ¶5. (C) With the tax law languishing in the Senate Finance Committee, and even staunchly pro-regime senators openly voicing opposition to it, it became increasingly clear that there was no constituency for this law. In the end, neither the Senate Finance Committee nor the new government felt it was worth risking political capital to push for ratification of a law resting on shaky legal ground. The cabinet made it clear it accepted that its predecessor should not have promulgated the bill as a temporary law, clearing the way for Senate rejection. Deputy Prime Minister Ziad Fariz acknowledged to the Ambassador that he had personally advocated encouraging parliament to debate and amend the law, and this option was discussed in cabinet. But the constitutional hurdle was judged to be too great. ¶6. (U) After the Senate's decision, all newspapers hailed the outcome. In one description, columnist Nahed Hattar wrote, "the law has been put behind us by means of a democratic process that represented the Jordanian community's will." A popular blogsite critical of the government, ajloun.blogspot.com, carried a piece titled, "Income Tax Law Rejected: The System Works." ¶7. (C) Many of those expressing outrage over the executive's abuse of the constitution have cheerfully endorsed widespread use of temporary laws in the past when it suited them - and are among those set to pay the most taxes in any reasonable reform plan. With parliament unable to renew discussion of a revenue-impacting bill until it adopts a budget, not likely until the very end of the current session in March 2006, needed tax reforms have been effectively delayed until the next legislative session begins, no earlier than November ¶2006. That gives the cabinet plenty of time to turn public opinion around, if it is so inclined. Hale