Puerto Rico's Fortuño Pushing Expansive Tax Reform

Puerto Rico Gov. Luis Fortuño Monday evening released an expansive tax-reform initiative to slash individual and business taxes by $1.2 billion per year, on average, between 2011 and 2016.

Officials anticipate that a new, temporary excise tax on non-resident distributors purchasing goods from Puerto Rico manufacturers and stronger tax-compliance measures will help offset the lost revenue.

Fortuño, a member of the pro-statehood New Progressive Party, touted his long-awaited tax-reform plan Monday evening before a special joint session of the Legislature. His administration has been working with Legislative leaders to craft a tax-reform proposal. The NPP controls both the House and the Senate.

“This is the largest, most comprehensive and equitable tax reform ever done in Puerto Rico and it is structured with the objective of fostering economic development and job creation,” said Carlos Garcia, president of the Government Development Bank for Puerto Rico. “The tax relief will total, on average, about $1.2 billion per year in the years between 2011 and 2016 The governor is of the belief that a dollar in the hands of the people is worth more than in the hands of the government.”

The GDB serves as Puerto Rico’s financial advisor and it helps the commonwealth access the tax-exempt municipal bond market.

To help pay for the tax reductions for families and businesses, the Legislature this weekend passed a temporary excise tax that will charge non-resident companies a 4% levy in 2011 on transactions with Puerto Rican manufacturers that have more than $75 million in sales. The rate will decrease each year until reaching 1% in 2016, and terminate afterward.

“The local manufacturing companies are not affected by this,” Garcia said. “The transaction that is being taxed is on the distributor, the company that purchases from the local manufacturing company.”

Officials estimate the new tax will bring in more than $1 billion in 2011, with revenues decreasing gradually each year as the tax rate gradually phases out.

Fortuño’s proposed tax cuts include a 15% tax credit in 2010 for individuals making less than $40,000. Those making between $40,000 and $100,000, and married couples with an income of up to $150,000, would see a 10% decrease in their taxes this year.

Individuals earning more than $100,000 and corporations would see a 7% tax cut in 2010, Garcia said.

Beginning in 2011, businesses would receive a 30% reduction and individual tax rates would decrease by 12%, on average, next year, with that tax relief increasing annually to a 50% reduction in 2016.

Garcia said the GDB will release details of the estimated costs of the tax cuts at an investor conference call Nov. 9.

Along with the new excise tax, the administration plans to absorb the decline in personal and corporate tax revenues with better tax-compliance measures. Garcia said the tax-reform plan includes a requirement that financial institutions report to Puerto Rico’s Treasury Department the income debtors report when applying for loans.

“So that can be compared to the taxable income that is reported on the tax returns,” Garcia said. “We’re putting a whole lot of teeth into tax evasion. There will be personal and criminal actions taken on tax evaders for the retention and payment of the sales and use tax, and other taxes.”

In addition, the administration will review all outstanding incentive laws and tax credits. Officials also estimate that lower taxes for both individuals and corporations will help boost business growth and employment on the island. Puerto Rico’s unemployment rate in September was 16%, according to the Bureau of Labor Statistics.

“These initiatives are being created and targeted to foster economic development and job creation that should also have a positive impact on revenues,” Garcia said.

The GDB president stressed that the tax-reform initiative will be “a better-than-revenue-neutral tax reform.” Officials plan to execute the tax cuts while they also work towards ending structural budget deficits. Puerto Rico’s fiscal 2011 budget includes $1 billion of sales-tax bond proceeds to help meet operating expenses. Fiscal 2011 began July 1. The administration expects to end such budget practices in fiscal 2013.

The tax-reform plan includes provisions to monitor the reform’s progress before implementing further tax cuts in 2014 through 2016. The commonwealth would need to reach specific revenue and economic growth targets while controlling operating expenses to reduce tax rates in 2014, 2015, and 2016.

Garcia said he will offer more details of those fiscal guidelines during the Nov. 9 investor call.

Standard & Poor’s analyst Horacio Aldrete Monday said he could not comment on the tax reform initiative until the credit rating agency reviews the exact details of Fortuño’s plan.

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