A week after Puerto Rico Gov. Alejandro García Padilla proposed his budget, key lawmakers in his own party were pressing for changes to make sure it accomplishes its revenue goals without hurting small businesses.
García Padilla — looking to shore up the government’s finances after the big three rating agencies cut Puerto Rico’s debt to one level above speculative grade — called for a 16% increase in revenues for the coming fiscal year’s operating budget.
Despite that, the budget projects a $750 million or 7.6% operating deficit.
The governor’s plan calls for a 191% increase in sales tax proceeds in fiscal 2014, to be achieved by expanding the list of services and products covered by the sales tax.
To accomplish that, measures must be added to make sure that the sales tax is more widely collected, according to Rafael Hernández Montañez, chairman of the Puerto Rico House of Representatives Finance Committee.
The budget should provide that the sales tax is collected entirely online, Hernández Montañez said.
The taxes are currently paid using paper forms. Businesses should be required to have checking accounts, he said in an interview.
García Padilla is proposing that when freelance professionals like graphic artists sell their services, a sales tax should be sent to the government.
Hernández Montañez will propose that companies who hire the freelancers, rather than the freelancers, send in the tax. It is easier to keep tabs on hundreds of companies than on tens of thousands of freelancers, Hernández Montañez noted.
José Nadal Power, president of the Puerto Rico Senate Committee on Finance, agreed that steps must be taken quickly to allow the online payment of the sales and use tax.
Nadal Power, who will support most of García Padilla’s proposals, said he was concerned that a proposal to place the sales tax on business real estate leases would push some small companies out of business.
Nadal Power said he will work to exempt the leases from taxation and will propose other revenue enhancements so that total revenue would be unchanged.
“We will do nothing to jeopardize efforts to improve our credit ratings,” Nadal Power said.
Nadal Power, Hernández Montañez, and García Padilla are in the Popular Democratic Party. This party holds the majority of seats in both the House and Senate.
As part of his proposal to change the sales and use tax, García Padilla is proposing that the tax on sales revenues going to municipalities be cut to 1% from 1.5%. That would allow the overall sales tax rate to decline to 6.5% from 7%.
The García Padilla administration claims that the municipalities will get at least the same amount of money as they do now because so many new services will be taxed.
Puerto Rico mayors have objected, saying that the governor is overestimating how much money can be raised.
The department that collects the sales tax is inefficient and many businesses get away without paying, said Aníbel Vega Borges, vice president of the Puerto Rico Federation of Mayors.
Any money the department collects with the proposed sales tax system beyond what amounts to 1% now will be kept by the tax collection department, according to Vega Borges.
Municipalities should continue to get 1.5%, Vega Borges said. Services should be gradually included in the sales tax. The lawmakers said they expect the budget to be completed and adopted in June. Puerto Rico’s fiscal year starts on July 1.
