Infobyte·10 min·March 2026

Tax expenditures without accountability

Between 2017 and 2023, Honduras accumulated USD 12.5 billion in tax expenditures — an amount equivalent to the country’s entire public spending on health and public investment over the same period. These are not visible outlays; they are revenues the state forgoes in pursuit of social or economic goals. Given the scale of these tax waivers — among the highest in the world — a systematic evaluation of their results is essential, followed by a careful reconsideration of their design.

Gabriela López — Sendas Think Tank

Translated from Spanish with AI assistance and reviewed by our editors. See a translation error? Email us.

Honduras' tax expendituresFootnote 1^[1] rank among the highest in the world

In 2023, Honduras recorded USD 2.2 billion in tax expenditures — equivalent to 6.5% of GDP, a level similar to higher‑income economies such as Portugal and Armenia.
This level is three times the 2% of GDP average for lower‑middle‑income countries, placing Honduras third highest within that group.
Within the Americas, it holds the fourth position (Figure 1).

Tax expenditure refers to fiscal benefits or incentives that reduce government tax revenues and, in turn, reduce the tax liability of the beneficiary (The Global Tax Expenditures Database [GTED]).

How do countries measure tax expenditures?

Nations use three main approaches (Redonda, 2016):
1. Revenue forgone method Governments estimate how much they would collect if the tax benefit did not exist, assuming taxpayers do not change their behavior. Most countries rely on this method.
2. Revenue gain method Governments estimate the additional revenue they would collect if they removed the benefit and taxpayers adjusted their behavior. Few countries use this method because it requires complex modeling.
3. Outlay equivalent method Governments calculate how much they would need to spend through transfers or subsidies to create the same effect as the tax deduction. This method remains rare.
Most countries reported in the Global Tax Expenditure Database (GTED) use the revenue forgone methodbecause it offers simplicity and comparability (GTED, 2021).
In Honduras:
Honduras also uses the revenue‑forgone method (SEFIN, 2025).
Authorities calculate the revenue they would collect by applying the legal tax rate to the observed transaction and compare it to the revenue under the preferential treatment. The difference represents the tax expenditure, assuming taxpayers do not change their behavior.

Figure 1

Tax Expenditures by Country Income Group (% of GDP)

This visualization is currently only available in Spanish.

Consumption and income taxes drive most of the tax expenditures

Between 2017 and 2023, Honduras allocated USD 1.2 billion per year to consumption‑tax expenditures — 4.5% of GDP.
This level is two to five times higher than other economies (Figure 2.a).
Income‑tax expenditures averaged USD 600 million per year or 2% of GDP, double the level in most peer groups (Figure 2b).

Figure 2

Tax Expenditures by Tax Type, 2017–2023 (% of GDP)

This visualization is currently only available in Spanish.

Tax expenditures absorb a disproportionate share of the tax system

Figure 3

Erosion of Tax Revenues by Mechanism, 2022 (% of Tax Expenditure Relative to Tax Collection)

This visualization is currently only available in Spanish.

Figure 3

shows the erosion indicator, which measures the share of tax expenditure relative to the revenue of each tax, namely:

Erosion_i = \frac{Tax\ Expenditure_i}{Revenue_i} \times 100

We calculate erosion at the total level, by broad tax type, or by specific mechanism. We then compute simple averages across countries within each income group.

HistoricallyFootnote 2^[2], sales tax (ISV) and corporate income tax (ISRPJ) show the highest erosion

For every USD 100 the government collects, it forgoes about USD 50 through incentives in the corporate income tax (ISRPJ) and the sales tax (ISV).
During COVID shutdowns, tax revenues fell, but tax expenditures remained stable.
Other mechanismsFootnote 3^[3] show lower erosion at levels below 30% (Figure 4).

Figure 4

Tax Revenue Erosion by Mechanism, 2017–2023 (% of Tax Expenditure Relative to Tax Collection)

This visualization is currently only available in Spanish.

ISV exemptions do not target low‑income households

The ISV exemptionFootnote 4^[4] aims to reduce the spendig burden on vulnerable households.
Low‑income households reach about 40% ISV‑exempt consumptionFootnote 5^[5], which places them only marginally above the 37–40% range that characterizes every income group (Figure 5).
Only 11% of the national benefit reaches the poorest quintile, while 33% goes to the richest (Figure 6).
The issue is not the existence of exemptions, but their lack of targeting.

Figure 5

ISV‑Exempt Consumption by Income Quintile, 2024 (Preliminary, % of Total Consumption)

This visualization is currently only available in Spanish.

Figure 6

Share of ISV‑Exempt Consumption in Total Consumption, by Income Quintile, 2024 (Preliminary)

This visualization is currently only available in Spanish.

We lack evidence that ISRPJFootnote 6^[6] incentives increase investment and employment

ISRPJ incentives concentrate in Free Zones (ZOLI)Footnote 7^[7]and Renewable EnergyFootnote 8^[8], which together account for USD 260 million around 65% of ISRPJ tax expenditures (Figure 7).
However, Honduras still relies on descriptive evidenceFootnote 9^[9] , which associates these incentives with investment or employment.

Figure 7

Composition of ISRPJ Expenditures, 2023 (USD Millions)

This visualization is currently only available in Spanish.

Most maquila firms in ZOLI operate in industrial parks in Cortés. They import fibers and machinery duty‑free and export finished products without paying ISRPJ, which strengthens their competitiveness. Firms outside ZOLI often use the Temporary Import Regime (RIT), which suspends taxes on imported inputs for re‑export.

Because maquila production consumes large amounts of energy, many firms also use incentives under the Renewable Energy Promotion Law, including a 10‑year ISRPJ exemption for energy generation. Large textile groups invest in solar and biomass plants to stabilize costs and combine multiple incentives.

The sector employs around 129,000 workers, which explains the political and economic relevance of these incentives. However, the benefits concentrate in a small number of firms, and the incentives do not always translate into higher value added or better working conditions.

Is restructuring tax expenditures necessary?

It may be — but only after learning how to evaluate their performance. Honduras grants large fiscal benefits, yet: ISV exemptions are not targeted, and ISRPJ incentives lack evidence of effectiveness in generating investment, jobs, or exports.

Without proper evaluation, any reform risks repeating the same problems under a different design.

Tax expenditures without accountability

Honduras' tax expendituresFootnote 1[1] rank among the highest in the world

Consumption and income taxes drive most of the tax expenditures

Tax expenditures absorb a disproportionate share of the tax system

HistoricallyFootnote 2[2], sales tax (ISV) and corporate income tax (ISRPJ) show the highest erosion

ISV exemptions do not target low‑income households

We lack evidence that ISRPJFootnote 6[6] incentives increase investment and employment

Is restructuring tax expenditures necessary?

Honduras' tax expendituresFootnote 1^[1] rank among the highest in the world

HistoricallyFootnote 2^[2], sales tax (ISV) and corporate income tax (ISRPJ) show the highest erosion

We lack evidence that ISRPJFootnote 6^[6] incentives increase investment and employment