Puerto Rico board rejects tax reform passed by legislature

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The Puerto Rico Oversight Board rejected the tax reform bill the local legislature had passed, saying it would push Puerto Rico off the road of a balanced budget.

In response, Puerto Rico House of Representatives President Carlos Méndez Núñez said he would like to meet board Executive Director Natalie Jaresko to talk about the board’s objections.

Subsequently Puerto Rico Gov. Ricardo Rosselló said that he was willing to meet with the board and legislative leaders about the legislature-passed tax reform, according to the El Vocero news website. However, he said that the tax reform would go ahead in its already voted-on form.

The board appears to think otherwise, saying in their Friday letter addressed to the governor, Méndez Núñez, and Senate President Thomas Rivera Schatz that the reform is currently inconsistent with their Oct. 23-adopted fiscal plan.

On Monday the governor’s representative, Christian Sobrino Vega, sent a letter to the board saying its criticisms of the bill were unfair and/or inaccurate.

In its Friday letter the board stated that the tax initiatives must be implemented with revenue-positive measures preceding the revenue-negative ones so as to be sure the revenues from the first will be adequate to cover the losses from the second.

Second, the board said that the assumed new sources of revenues have inadequate allotments for behavioral, economic, demographic, substitution, and implementation risks.

Third, the board called for explicit limits on the granting of tax credits and the restoration of the Tax Credits and Disbursements Authorization Committee, which the current bill eliminates.

Fourth, the board objected to several measures in the bill. It said that the bill’s plan for introducing taxed video lottery machines as a source of revenue may “cannibalize” existing fiscal plan revenues. The board said the Puerto Rico Department of Treasury shouldn’t be given the authority to waive taxes and fees after the department declared an emergency.

The board complained that the local officials had failed to respond to the board’s multiple requests for data to confirm the bill’s revenue neutrality.

The board said the current bill also has poorly designed features. For example there would be increases to a 4% rate in business to business sales taxes from 0% when a business’ revenue exceeds $200,000. The bill would include a jump in rates when service provider’s income goes over $100,000. These provisions “will inevitably generate significant incentives to avoid, misreport and evade the payment of taxes due.”

The board complained that inconsistencies in the way the bill treats different income sources probably would create compliance and enforcement challenges.

In Sobrino Vega’s letter to the board on Monday, he said that the board, in bringing up the bill’s shifts in tax rates depending on amounts of businesses’ revenue or service providers’ incomes, fails to mention that taxpayers have the option of continuing with the regular tax regime.

Sobrino Vega said that the bill is “still consistent with the fiscal plan as the implementation of tax law initiatives occurs sequentially.”

Jaresko’s doesn’t adequately consider the impact of the administrative provisions in improving tax compliance and thus increasing revenues, Sobrino Vega said.

He said that while the Puerto Rico Treasury is still measuring the impact of the Puerto Rico Senate and House of Representatives bill amendments on the bill’s revenues, he believed the most “critical changes” are revenue neutral.

Late on Monday, Jaresko responded to Sobrino Vega’s letter with a statement to The Bond Buyer, “The board requested additional data from the government to determine if the tax proposal is revenue neutral. We are still waiting for that data.”

A source close to the board said: "There are now four tax bills in the legislature but as of today we don't have data to score them."

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