Puerto Rico's Tax Collections Surge by 44%

Puerto Rico’s efforts to reduce its deficit have been helped by net tax revenues surging by 44.1% in October year over year, following tax hikes, but may be hurt by a new projection of economic growth in the fiscal year at negative 0.8% replacing the old positive 0.2% projection.

Additionally, sales and use tax revenues, which are not included in net tax revenues for the general fund at this point in the year but are diverted to pay off Puerto Rico Sales Tax Financing Corporation (COFINA) bonds, increased by only about a third as much as expected.

General fund net tax revenues were $856 million in October compared to $594 million in October 2012, Puerto Rico secretary of the Treasury Melba Acosta Febo reported. Compared to government projections October net revenue was up $109.9 million or 14.7%.

Gross taxes in the general fund were up 40.8% from October 2012 to this October.

Over the first four months of fiscal 2014 net revenues are up 15.9% from the first four months of fiscal 2013. For this period revenues are coming in 4.9% above projections. Sales and use tax revenue increased in October by $8.6 million compared to October 2012. While this was a 9.7% increase, the government had projected a roughly 31% increase.

The Treasury is analyzing the reasons for the variation and is considering various measures to address it. It is already hiring 30 auditors for the sales and use tax division. It is considering hiring 60 more and is planning other steps.

All the tax revenues announced Monday are preliminary and are subject to revision, Acosta Febo said.

In other Puerto Rico statistical news, the Puerto Rico Planning Board announced that it was revising its projection for the economy in the current fiscal year. Rather than projecting 0.2% growth of inflation adjusted gross national product, the board is now projecting a 0.8% decline.

Reasons the board cited for the revision include higher-than-expected oil prices and lower-than-expected growth in the United States gross domestic product.

On a brighter note, the planning board now believes Puerto Rico GNP went down just 0.03% in fiscal 2013, compared to its 0.4% April estimate.

Given that the most recent figures for Puerto Rico’s economic activity index in August showed a 5.4% decline, the planning board’s revised projection is not a surprise, said Janney Capital Markets managing director Alan Schankel.

In creating its projections for its new revenue enhancements, the government made some conservative assumptions. This gives it some wiggle room with the economy, Schankel said.

“One caution I would have is the potentially cumulative economic drag of these higher revenues – more taxes, higher water rates, and a higher petroleum tax -- could be expected to slow the economy further in the short term, although presumably this has been factored into estimates,” he said.

“It seems to me that on-budget revenues with a third of the year behind are a harbinger of successfully executing the plan to rein in budget deficits this year and perhaps next,” Schankel said.

Acosta Febo said, “Despite macroeconomic headwinds, revenue figures for September and preliminary results from October are strong on a year-over-year basis, demonstrating that the actions we have taken to grow revenues and ensure compliance are working well.  We are confident in our ability to continue to make significant progress on our fiscal and economic development plans and remain focused on creating a platform for sustainable economic growth and job creation in Puerto Rico.”

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