Puerto Rico may be poised for a third reconsideration of its value added tax, as an influential legislator called for an alternative set of measures that would include $1.2 billion in tax cuts and spending measures.
Rafael Hernández Montañez, Chair of the Puerto Rico House of Representatives Treasury and Budget Committee, called Wednesday for an overhaul of the island’s tax system. Hernández Montañez is a member of the same party as Gov. Alejandro García Padilla and generally his ally.
Hernández Montañez’s call came a day after the governor agreed to postpone by two months a planned increase of a business-to-business services tax to 11% from 4%. The tax increase is now planned to occur June 1 rather than April 1. The tax hike was the centerpiece of a planned transition to a value added tax from a sales tax on the island.
“The value added tax will not happen,” Hernández Montañez said Wednesday in a PowerPoint presentation.
There are conflicting reports about whether Hernández Montañez is opposed to the value added tax. One of his aides said Wednesday he is neutral about it and the El Vocero news website said that on Tuesday he stated his opposition to it.
Hernández Montañez said in presentation emailed from his office that Puerto Rico’s economic activity was down 20% from fiscal year 2006 to fiscal year 2015. He said his goal was to balance the tax system with economic activity.
“If there is one thing that the 3.5 million inhabitants of the island agree upon, it is that we do not want any more tax increases,” Hernández Montañez said.
The legislator proposed $1.2 billion in tax cuts and spending measures that would go into effect in the coming fiscal year. For comparison, the current fiscal year’s budget was approved with a projection of $9.8 billion in revenues.
Hernández Montañez will hold a public hearing on some of his proposals on March 29, his aide said.
The measures revived some proposals the governor made in the winter of 2014-2015: an increase in the minimum level of income exposed to income taxes and the introduction of regressivity relief for the poor.
Income taxes would not be due from single people earning less than $40,000 and couples earning less than $80,000.
The legislator presented data showing that tax increases from fiscal year 2012 to fiscal year 2017 have disproportionately hit the island’s working poor, compared with its moderate income and affluent residents. For example, single residents earning $20,000 annually now have their taxes eat up an additional 2.48% of their income compared to fiscal year 2012. By comparison a married couple earning $80,000 annually and having a $5,100 mortgage interest deduction have now pay an additional 0.88% of their income in taxes.
To address the regressive impact of increased consumer taxes, Hernández Montañez called for the government to send checks to those making around $15,000 to $20,000. He called for an annual check of $300 to be sent to those over 65.
To pay for his proposed measures the legislator proposed several alternatives. These included increasing the tax rate on tangible goods to 15%, imports to 15%, processed food to 10%, and services to 5%. All these would include a 1% sliver for the municipal governments.
He also suggested an increase in the tax on foreign manufacturers to 5.5% from 4%, a 10% excise tax at the ports, and a 1.5% tax on the repatriation of capital gains.
Any hearings on the subject would be the third time in 15 months that Puerto Rico’s legislators discuss the value added tax and possible alternatives. The first took place when the governor proposed the VAT in the winter of 2014-2015 through spring of 2015. The second occurred in the fall when a special committee met to discuss the topic. It ultimately settled on choosing the VAT.
