Puerto Rico reported that its April revenues were 26% below government projections as corporate tax collections came in $380 million short.
The collection gap, reported by the commonwealth's Treasury Department Friday, is a blow to the government's effort to reduce its deficit in the current fiscal year and the one following. After the report, the yield on the 8% coupon general obligation bond due 2035 from its $3.5 billion sale in March jumped 21 basis points to 8.97% Monday morning in the secondary market, according to data provided by Bloomberg, with trading volume 57.3% above its 100-day average.
"Puerto Rico's most recent revenue report highlights the implementation risk in the commonwealth balancing its fiscal year 2015 budget," said David Litvack, managing director for U.S. Trust. "Given that the major revenue shortfall was in corporate income taxes, it also calls into question the ability of Puerto Rico to cut its fiscal deficit while simultaneously stimulating its economy."
Through April the government's general fund collections are 4.4% below projections. By comparison, through March collections had been 1.2% above projections. In April the government collected $1,180.9 million of revenues, net of refund reserves, compared with its projections of $1,623 million.
Puerto Rico Treasury Secretary Melba Acosta Febo said that her agency was still analyzing the corporate tax results but that it had preliminarily identified some factors after the April 15 tax-return filing date.
"We are looking closely at the corporations that requested extensions," Acosta Febo said in a written statement. "We are analyzing the thousands of applications for time extensions that were not accompanied by payments ..., corporations that did not make estimated payments, and payments by corporations that were below expectations." The department said that 53% of all corporations requested an extension and did not make a tax payment.
There are always a large number of corporate taxpayers that request extensions, mostly because the income tax returns have to be filed with audited financial statements and often these statements are not finalized by April 15, a Treasury Department spokeswoman said. Despite the Treasury having expected many corporations to take extensions, it also expected payments to accompany the extension requests. The Treasury is concerned with the number of extensions filed without payments.
The Treasury is contacting those corporations that should have accompanied their extension requests with payments but did not, or who sent in less than they should have. Those that sent in less than they were supposed to face surcharges of 10% plus an annual interest rate of 10%.
The Treasury is also examining other possible explanations of the corporate-tax revenue shortfall.
The time extension for corporations is three months and ends July 15. If corporations were to submit their taxes in early July the money would be credited normally to fiscal 2015 rather than the current fiscal year. However, the extensions should normally have been accompanied by payments and the Treasury is now seeking those payments with the penalties and interest charges.
While the corporate tax accounted for 86% of the month's missing revenues, nine of the commonwealth's 11 tax-revenue categories came in less than expected.
Seven of the nine categories were less than 10% short, ranging from 3.4% short for the sales-and-use tax to 8.5% short for the excise tax revenues for foreign corporations (Act 154). Non-resident withholding came in 29% short.
AllianceBernstein's director of muni research, Joseph Rosenblum, said April's collections were disappointing. "At a minimum we appreciate the greater transparency around revenue trends and the attempt to achieve structural budget balance for the coming fiscal year," he said.
"Any development and passage of a budget is a process and adjustments are not uncommon," he added. "What will be important is understanding how much of weaker revenues in fiscal 2014, if any, was incorporated into proposed fiscal 2015 budget estimates and how much additional adjustment will need to be made."
The Treasury is analyzing April revenues to determine whether they may affect fiscal year 2015 estimates. Acosta Febo said that April 2014 revenues were 20% higher than April 2013 revenues. She also noted that sales and use tax revenues were the highest ever for April, and higher than they had ever been for any other month except for December and January.
