After Puerto Rico's House of Representatives voted down a proposed tax reform that would have increased revenues, some legislators called for alternate approaches to balancing the government's books.
Between 3:00 a.m. and 4:00 a.m. Thursday the House voted 28 against and 22 for a proposed 14% value added tax to replace the island's 7% sales and use tax. The proposal also included a reduction in income taxes.
Six members of Gov. Alejandro García Padilla's majority Popular Democratic Party joined with the delegation from the New Progressive Party to vote against the tax reform. All 22 who voted in favor were members of the governor's party.
At 4:54 a.m. the governor sent out a statement with House President Jaime Peréllo in which they "warned that the actions of the [six PDP] legislators are an affront to the best interests of the people." They "said that such action may have negative consequences on the financial stability of the country, endangering the continuity of public services, the retirement system, debt repayment and implementation of health services."
The governor also said, "It is up to us to retake the responsible course of action and go ahead with the reconstruction agenda."
The Puerto Rico press had reported that Senate President and PDP member Eduardo Bhatia had supported an 11% consumer tax, similar to the levels proposed by some of the dissident PDP members. Bhatia released a statement less critical of the dissidents and more focused on the future than the one from the governor and Peréllo.
"The commitment of the Legislative Assembly of Puerto Rico to fiscal responsibility is unwavering," Bhatia said. "In the legislative process, the common goal is achieved different ways. In this case, the differences of opinion focused on the magnitude of the impact the proposed fiscal measure would have had on the economy Puerto Rico.
"The collective leadership is essential at this time. Time is short. I call for disputes to end and for us to develop and implement a credible balanced budget that includes spending cuts and tax collection measures that are quick to implement and consistent with the economic reality of Puerto Rico," Bhatia said.
Municipal Market Analytics managing director Robert Donahue said the governor's tax reform "was too complex and controversial to be pushed through so quickly. There was considerable disagreement over the rate, exemptions and its broad economic impact. The most recent House bill was over 1,000 pages long."
With tax revenues through the end of March coming in $153 million less than budgeted and the Treasury recently announcing that it expected revenues to come in $100 to $200 million short in April. "Puerto Rico is evaluating its cash flow needs approaching the end of the year," Donahue said. "Without the hoped for Puerto Rico Infrastructure Financing Authority bond proceeds that would allow the Government Development Bank for Puerto Rico to cover deficits, the island faces liquidity concerns.
"Depending on the magnitude of the deficit, it will need to make a series of emergency actions and prioritize obligations," Donahue said. "It is too early to tell if this will affect debt payments yet."
In March Puerto Rico sold a $246 million bond anticipation note to RBC Capital Markets based on recently instituted oil tax increases. The GDB said that the note is separate and apart from the planned PRIFA bond.
Two of the PDP legislators who voted against the tax reform bill explained their no votes in statements released from their office.
"From the time when the tax reform project was presented, I expressed my reservations to a rate of 16% or even 14% as too high and not appropriate for the times," said Rep. Luis "Piti" Gándara. "I was concerned about its effect on the ailing economy. Other colleagues and I spent two weeks looking for ways to lower the rate as much as possible but we could not reach an agreement to lower it beyond 14%. For this reason, I voted against the project."
Rep. Manuel Natal Albelo said, "My position on the proposed tax reform has been clear from the outset: I'm in favor of reforming our tax system to make it a more fair and equitable, moving to a value-added tax on the ground that is a more tax efficient than current sales and use tax, and of tax justice for the working middle class.
"However, the proposed rate was very high, given the starting point of the current 7%, and the referred tax relief did not conform to the fiscal reality of the country, did not seek a fair share from exempted sectors and finally, did not attend to the main fiscal problem of Puerto Rico: the monumental public debt," Natal Albelo said.
Natal Albelo said he was committed to working with other members of his party in the House of Representatives to carry out a tax transformation.
A source close to Gándara said she supported increasing the current sales and use tax rate. She also supported a new tax on large chain stores on the island and some other tax measures found in the bill she voted against.
PDP member Sen. Gilberto Rodríguez Valle said he had supported the measure sponsored by Peréllo in the House. He said he was in favor of "real tax reform" rather than of tax increases, which he said the six dissenting PDP members favored.
