The Puerto Rico's House of Representatives' passage of a more than 50% increase in consumption taxes Thursday was just the first of several anticipated steps aimed at putting the government's finances in order.
The House passed the bill to raise the island's sales and use tax to 11.5% from 7% from early July through March 31, 2016. The bill specifies that a commission will be set up to determine what to do with consumption taxes when the tax rise elapses. The governor is advocating for a value added tax.
The Puerto Rico Senate had not formally received the bill from the Senate on Friday and so could not work on it. However, Senate commissions will consider it on Saturday and Sunday, according to El Nuevo Dia news website. Despite Monday's holiday, the whole Senate will meet on Monday to consider and vote on it, a Senate source said.
The party of Puerto Rico Gov. Alejandro García Padilla, the Popular Democratic Party, holds 67% of the seats in the Senate while it holds 55% of the seats in the House. This greater dominance may mean it will be easier for the governor to pass a bill in the Senate than it was in the House.
The Senate source said she believed the measure had sufficient votes to pass.
All or nearly all members of the governor's party in the Senate were present on the evening May 14 when the governor and PDP representatives and senators reached a consensus on the tax rise.
In recent days those buying and selling Puerto Rico's general obligation 8s issued in March 2014 have seen the government's move towards approving the tax rise to be a credit positive. Yields in block sized trades have lowered substantially since May 14, the last trading day before the agreement was reached. The trading yields went down 59 basis points to 9.94% on Thursday from 10.53% on May 14, according to Markit.
If the Senate approves the bill, the governor will sign it. This would leave at most five more weeks for the legislature and governor to approve a budget before the July 1 start of a new fiscal year.
The government has said that it or the Government Development Bank for Puerto Rico may not be able to make all debt payments due in July or August unless the Puerto Rico Infrastructure Finance Authority sells a bond. Government leaders have said the bond could not be sold until the government passes a balanced budget for the coming fiscal year and a five year fiscal plan.
NewOak managing partner Triet Nguyen was cautious about the House's action, saying, "We are encouraged that the House passed it since that is where the last value added tax proposal was defeated. However, there still doesn't seem to be consensus about the eventual transition to a full-fledged VAT. So the cloud hanging over COFINA bonds hasn't gone away.
"In the meantime, we suspect the increase in the sales and use tax will further hurt economic activity on the island and probably won't raise as much revenues as expected," Nguyen said. "The higher the rate, the more incentives residents will have to avoid it. Even assuming the budget will pass and the Puerto Rico Infrastructure and Finance Authority bond is successfully placed, we believe this will only buy the commonwealth no more than a six to nine month reprieve."
Bel Air Investment Advisors director of municipal research Michael Ginestro was more positive. "The sales tax increase, I believe, is a short term positive for Puerto Rico. It also increases the likelihood for them to get additional liquidity in the capital markets which they desperately need to execute on a fiscal plan."
Ginestro continued, "I believe that if they can pass a sales tax increase, the likelihood of default over the next six months has diminished."
