US embassy cable - 05SANJOSE1774

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.] 
 
--------------------------------------------- ------------- 
DEAL MAKING - REMOVAL OF PROPOSED AMENDMENTS TO THE FISCAL 
REFORM BILL FOR SENDING CAFTA-DR TO THE ASSEMBLY? 
--------------------------------------------- ------------- 
 
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