Puerto Rico Gov. Anibal Acevedo Vila would like to replace 4.5% of the commonwealth's 7% sales tax with a revamped excise tax, yet legislative leaders are more interested in implementing spending cuts than swapping revenue streams.

Last week in his state of the commonwealth speech, the governor proposed eliminating 4.5% of the sales tax with a new and improved excise tax, a move he believes would help boost the island's economy. The plan would need to gain legislative approval, but Senate President Kenneth McClintock said the sales tax reduction plan may not make it through the Senate.

"I think once we hold public hearings ... his proposal will be dead upon arrival," McClintock said.

The Senate president prefers the sales tax to a new excise tax, saying an excise tax is inflationary and would still affect consumers as businesses will add the cost of the tax onto the price of goods.

"If you impose it at the beginning of the chain and not at the cash register, [the cost] multiplies," McClintock said.

House Speaker Jose Aponte said that while he supports decreasing the sales tax to 2.5% to help spark more retail spending, he does not favor implementing a new excise tax. Instead, he prefers reductions in government spending to help balance the budget.

"The problem isn't to gain more revenues, the problem is to use the revenues that we have now in a more efficient form," Aponte said.

Like Aponte, McClintock stressed that the governor needs to make spending cuts. He pointed to recent spending increases for fiscal 2009, including teacher salaries increasing $250,000 per month. Acevedo Vila will release his fiscal 2009 budget next month.

"If he does that and reduces the state sales tax to 2.5% percent, where is the revenue going to come to pay for those other things?" McClintock said. "He's talked about reimposing the excise tax, but the excise tax has proved to be highly inflationary over time."

Officials ended a 6.6% excise tax and implemented the island's first-ever sales tax in November 2006. With the sales tax, the first percentage point secures $2.6 billion of Puerto Rico Sales Tax Corp. bonds, another 1.5% goes to municipalities and local governments, and the remaining 4.5% goes to the general fund. The corporation has authority to tap into the 4.5% of sales tax revenue if need be to help cover debt service costs, as the commonwealth is obliged to allocate at least $185 million of funds annually to the fund, with that amount growing each year by 4%.

Acevedo Vila proposes replacing the 4.5% of sales tax revenues with a new broader excise tax that would exempt only two types of goods, making the tax easier to enforce than when it was in place before. While the 1% dedicated sales tax revenue stream would continue, the governor's plan puts in question whether bondholders and investors will have additional credit comfort beyond the dedicated 1%. q

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