Puerto Rico’s tax reform, in context

by | Jan 17, 2019 | Economy | Comments

On December 10, 2018, Puerto Rican Governor Ricardo Rosselló enacted a tax reform bill hoping to put money back into the pockets of Puerto Rican citizens for investment and consumption to stimulate the economy. House Bill 1544, now Law No. 257, primarily updates the “Internal Revenue Code for a New Puerto Rico” to simplify the tax code, and reportedly will give Puerto Rican citizens over $2 billion in tax relief over the next five years.

Details of these tax changes include a decrease in the corporate tax rate from 39% to 37.5%, a reduced sales tax on prepared foods from 11.5% to 7%, a 5% individual income tax credit, increased withholding tax for services from 7% to 10%, a new determination of net income, and optional fixed tax rates for service businesses and self-employed individuals. The individual income tax credit will give every tax paying citizen somewhere from $300 to $2,000, amounting in over $200 million in earnings saved by the populace.

Other measures in the recent bill include legalizing more slot machines, while also restricting the number of casinos one can own, and increasing the amount of savings that must be held as security. Revenue from these machines is expected to hit at least $160 million, a fourth of which will go towards general government funding and the rest will be allocated to municipalities and police.

The Senate approved the bill back in November before it was sent to Governor Rosselló. However, ambiguity remained on whether the bill would actually get passed, as it had yet to be approved by the Oversight Board. The prime concern of Natalie Jaresko, the executive director of the board, was whether the slot machines will actually bring in as much additional revenue as projected, or if the revenue will simply be reallocated from other areas of the economy. If the latter is true, the territory could find themselves with a unbalanced budget, more debt, and economic instability.

The softened fiscal austerity of the Puerto Rican government may be a sign of the rebounding confidence of citizens and officials in the territory’s economy. However, Puerto Rican professor of economics and finance Antonio Fernos seems to agree with Jaresko that the measures in the bill could spell financial misfortune, as he said “Why are they doing this, especially on an island that is insolvent and needs more sources of revenue?” He further stated that he believes simplification of the tax code and tax breaks will not greatly incentivize entities to pay their taxes if they were already evading them.

Nevertheless, Governor Rosselló and other officials still contend that the bill is a crucial step in stimulating the economy and keeping Puerto Rico competitive with other states and nations. This bill comes after the US tax law changes in hopes of stimulating foreign investment, and helping workers and business owners in turbulent times.

Most changes will apply to fiscal quarters beginning after December 31, 2018. However, aspects like the prepared food tax cut will not come into effect until October 2019. Additionally, the bill is still vulnerable to the whim of the Financial Oversight and Management Board in the case of budget issues, however, meaning future tweaks in the bill may arise. The President of Puerto Rico’s Association for Public Accountants stated regarding the bill, “There’s still a lot of work to be done to completely transform the tax system … but we see it as a good first step.”