The Puerto Rico Oversight Board expressed concerns that a tax reform plan agreed to by leaders of the local government may be inconsistent with the fiscal plan approved this month.
Gov. Ricardo Rosselló, Senate President Thomas Rivera Schatz, and House President Carlos Méndez Núñez announced the tax deal on Monday.
In a press release Monday night, the board said the local government had provided it with inadequate information. The board added that the proposal seemed to be inconsistent with the fiscal plan, which was adopted as part of the board's mission under the Puerto Rico Oversight, Management and Economic Stability Act.
The fiscal plan sets guidelines for revenue and expenses as the island's government and public corporations restructure their bond debt.
Local leaders have been working on the tax reform package since the spring.
The board said the fiscal plan clearly stated that any tax reform must be revenue neutral, with any measures expected to reduce revenues offset by alternative measures that will increase revenues by equal amounts.
“Each tax measure must also include confidence building elements, such as behavioral adjustments and reasonable capture rates,” The board said. “To date, the Oversight Board has not received a list of specific payfors that will be used to offset proposed decreases in tax revenue. The legislature also added several new provisions to the draft bill that, without further information, appear inconsistent with the certified fiscal plan.”
The board asked the local government for a list of payfors.
Among the local government's proposed tax measures are plans to reduce the levy from 10.5% to 7% for processed foods and eliminate the business-to-business tax on firms earning $200,000 or less. The measure also would offer a 5% tax credit to all taxpayers, introduce an earned income tax credit, and reduce corporate rates.
As part of the plan the local government said it would introduce measures that include “behavior changes” that would increase tax revenues by $405 million.
The board’s complaints about the local government’s tax reforms continue a struggle over policy authority.
Monday evening’s statement wasn’t the board’s first communication about the tax reform to the local government. On Oct. 18 board Executive Director Natalie Jaresko sent a letter to Rosselló, Rivera Schatz, and Méndez Núñez about it. In her letter she said that the board required a copy of the draft legislation and a list of the “specific, quantifiable measures over the next five years that will be used to pay for any proposed reductions in revenue.” She said that improvements in compliance would not be counted in projections of improving revenues.
In her Oct. 18 letter Jaresko said that the current tax reform failed to shift from the Act 154 tax on foreign company profits to a “broader, more progressive tax regime.” The tax reform also fails to create a simpler, more broad-based tax system, which Jaresko said was a “challenge to be addressed in the future.”
