Puerto Rico senator proposes tax breaks for resident bondholders

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Puerto Rico Sen. José Nadal Power has submitted a bill providing tax breaks for residents of the island who have lost money on its bonds.

Under the bill a tax credit on Puerto Rico government taxes would be created that people could take for up to 5% of the value of their losses per year. They could take the credit for up to 10 years for a maximum credit of 50% of their losses.

“This bill seeks to provide justice to those taxpayers of Puerto Rico who invested in the debt of the island, under the belief that the government had the capability to pay the bonds,” Nadal Power said Monday. “The brokerage firms and some investment advisors made thousands of citizens believe it was safe to invest in Puerto Rico bonds, which caused too many people to lose their savings and retirement.”

Nadal Power is a member of the Senate Treasury Committee, a committee he presided over from 2012 to 2016.

Under the bill the government would provide compensatory checks to those who don’t file income tax forms, are retired, or are over age 65.

Bond market observers were generally skeptical of Nadal Power’s proposal. Puerto Rico debt crisis commentator Cate Long said that privileging one class of debtor over another was contrary to federal laws and, in particular, the Puerto Rico Oversight, Management, and Economic Stability Act.

In an email she cited Bankruptcy Code 1123(a)(4), which PROMESA incorporated, that says a bankruptcy must treat all creditors holding a particular form of debt equally.

On the other hand, University of Illinois at Chicago Prof. Robert Chirinko said of the proposal, “It is clearly an important policy that addresses a really important social problem in Puerto Rico.” Chirinko said if the bill was passed, non-resident bondholders probably would have to pay for the policy through reduced recoveries.

If the bill passed, it would probably make younger island residents pay more in taxes and this might push more to leave the island – aggravating an existing problem, Chirinko said.

The proposal “seems like another attempt to choose winners and losers at the cost of mainland creditors,” said Tim Travis, chief executive officer of T&T Capital Management. T&T owns Puerto Rico bonds and stock in some bond insurers with Puerto Rico exposure.

“I don’t put much weight in this nor do I think it really goes anywhere unless it finds more support,” said Shaun Burgess, analyst at Cumberland Advisors. Cumberland holds insured Puerto Rico debt. “I understand the motivation, but to do something like this in the midst of the commonwealth restructuring their existing debt is highly questionable. I don’t know how this would affect the broader restructuring negotiations so we will have to see.”

Nadal Power’s proposal has some similarity to a proposal from Sen. Bernie Sanders, I-Vt., and some liberal U.S. Senators from late July. The senators proposed canceling all $74 billion in Puerto Rico public sector debt. The federal government would provide $15 billion in federal funding to compensate the debt holders. Of this half would go to those on the mainland and half would go to Puerto Rico residents, banks, and credit unions that solely do business in Puerto Rico.

None of the federal funds would go to hedge funds, bond insurers, or financial firms with assets greater than $2 billion. This proposal has gained little support in the U.S. Senate.

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