Puerto Rico board, government reach tax cut compromise

The Puerto Rico Oversight Board reached a tax cut compromise with the local government, the board indicated Wednesday.

The non-recurring action will allow 177,000 taxpayers to receive a refund when they file taxes for this year, while an additional 413,000 residents will receive larger Earned Income Tax Credit payments, the board said.

Gov. Pedro Pierluisi said the reductions, if approved by the legislature, would cost the local government $260 million this fiscal year.

Over the last few weeks Puerto Rico’s legislature has approved what Board Executive Director Robert Mujica Jr. said was one of the largest tax cuts in recent years and, when combined with recent proposed spending measures, Puerto Rico’s central government would be running a deficit.

Specifically, he said the proposed tax cut would reduce revenues by $750 million this fiscal year (which runs to June 30) and by about $3 billion over the next five years. For comparison, the current fiscal year general fund budget is for $12.74 billion.

The legislature passed measures in the first few months of the fiscal year with a $1 billion impact on the budget, without raising revenues to pay these costs, Mujica said.

While the federal government provided large amounts for the island’s Medicaid program, in recent years, Puerto Rico cannot count on a continuation, Mujica said.

Increased spending for the University of Puerto Rico or more aid to municipal governments could be needed, he said. Other areas the government may need to assist include funding for the Earned Income Tax Credit, expanding Medicaid, supporting the pension system, or wage hikes for fire fighters, Mujica said.

These costs could affect the fiscal balance in this and future years, particularly if Puerto Rico lowers taxes too much, Mujica said.

Gov. Pedro Pierluisi said it is the board’s expectation “the federal government would eliminate much of the funding we receive under the Medicaid program” within five years. Pierluisi is convinced this won’t happen.