Puerto Rico Tax Reform Evolves

Puerto Rico's legislative leaders are negotiating with Gov. Alejandro García Padilla a revised version of his tax overhaul that may pare back a proposed value added tax while imposing some additional levies.

Under Padilla's proposal about two months ago, a 16% value added tax would replace the island's 7% sales tax. His plan would eliminate income taxes for the lower and lower middle classes and reduce income tax rates for others.

Those proposals were uniformly rejected in the business community, even though there's general agreement on the island that the current tax system doesn't work, said Puerto Rico Senator Ramon Nieves Pérez. Problems in the current system include a low rate of collections of the sales tax and excessive loopholes allowing tax evasion.

The legislature has to finish its work on the tax reform soon to determine how much revenue the commonwealth government will have in the coming fiscal year, Nieves Pérez said. The governor has asked the legislature to complete its work by April 15.

The Puerto Rico Senate and House of Representatives held hearings on the governor's proposals until two weeks ago. Concern centered on the economic impact of a 16% value added tax, Nieves Pérez said.

Both House Speaker Jaime Perello and Senate President Eduardo Bhatia Gautier have objected to the 16% rate. Bhatia Gautier and senators in his party have met to discuss what should be in the tax reform, said Obed Rojas, spokesman for Senator Gilberto Rodriguez Valle.

Perello, Bhatia Gautier, and Garcia Padilla have met in negotiations for about two weeks.

The legislative leaders are trying to reduce the VAT rate, Nieves Pérez said.

The governor has said that any lowering in the VAT rate must be accompanied by to increases in taxes for other things, so that the changes are revenue neutral.

All parties now agree that private education and healthcare should be exempt from the VAT, Nieves Pérez said. However, if these are exempt one has to look elsewhere for the revenue they would have provided.

Legislators have discussed introducing new taxes on the big chain retailers in Puerto Rico like Walmart, Nieves Pérez said. "There's been concern about the taxes they pay vis-à-vis their actual earnings."

Completing this plan by April 15 would leave the legislators little time to consider the proposed changes, Nieves Pérez said. The time pressure is even more important, he said, given the potential impact of tax reform on the economy.

The legislature needs to know the level of revenue before it works on the budget. It must start working on the budget soon because a new fiscal year will start July 1.

Bhatia Gautier has emphasized that it is more important to get the tax reform done right than to get it done by April 15, Rojas said. It is unlikely the tax reform will be passed by April 15, he added.

A member of Sen. Carlos Vargas Ferrer's staff said legislators of the governor's Popular Democratic Party will meet on Thursday to discuss with the PDP leadership the negotiated tax reform. The PDP holds a majority in both the House and the Senate.

The governor is proposing spending cuts of $250 million in the coming year budget, said Rep. Luis Vega Ramos. This money and any tax raises outside the VAT could be used to reduce the adopted VAT rate, he said. Vega Ramos, like the others legislators mentioned in this story, is a member of the PDP.

by Robert Slavin

Puerto Rico Tax Reform Evolves