Bonds

Puerto Rico board says tax reform bill is too expensive

The Puerto Rico Oversight Board told the government that a legislature-adopted tax reform bill is too expensive. 

The board said the tax cuts in the bill — passed by the Puerto Rico House of Representatives Tuesday — would cost Puerto Rico’s central government $3 billion over five years.

“Fiscal irresponsibility resulted in painful adjustments to government spending,” the board said in a written statement Wednesday. “The tax bill the legislature rushed through voting … was not sufficiently evaluated for its cost and economic impact.”

Speaker of the Puerto Rico House of Representatives Rafael Hernández Montañez said he would send a House-passed tax cut to the governor Thursday.

“The bill threatens the government’s fiscal stability,” the board said. “The substantial losses in revenue would push the government’s budget back into deficit, erasing the progress made in recent years to stabilize Puerto Rico’s finances. It is significantly inconsistent with the fiscal plan for Puerto Rico, the current fiscal year budget, and [the Puerto Rico Oversight, Management, and Economic Stability Act].”

The bill would reduce Puerto Rico government revenues by about $750 million this year and almost $3 billion over five years, the board said. For comparison, in fiscal year 2023 Puerto Rico’s general fund had $13.62 billion in revenues.

The board urged the House to not send the bill to Gov. Pedro Pierluisi for signing and asked Pierluisi not to sign it if he receives it.

House Speaker Rafael Hernández Montañez told El Nuevo Día he planned to send the tax bill to Pierluisi Thursday.

Spokespeople for Pierluisi, the Puerto Rico Fiscal Agency and Financial Advisory Authority, and Hernández Montañez didn’t immediately respond to a request for a comment on the board’s statement.

“Any potential tax reform must be fiscally responsible,” the board said. “The Oversight Board will continue to work with the governor and legislature towards a truly comprehensive tax reform that can contribute to Puerto Rico’s competitiveness as a crucial part of its economic development.”

Puerto Rico’s central government completed a restructuring of $33 billion of bond debt in March 2022.

Puerto Rico Clearinghouse Principal Cate Long noted central government revenues in the first four months of the fiscal year are $638 million above projections. “Either [board consultant] McKinsey is no good at making revenue projections or the Puerto Rico economy has much more strength than the Oversight Board acknowledges.”

In recent years observers expressed concerns about how the local government will behave without the board’s oversight on financial matters. PROMESA requires the local government to pass structurally balanced budgets for four consecutive fiscal years and to gain affordable access to the capital markets before the board dissolves.

In August, Pierluisi proposed tax cuts that the board criticized.

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