Analyst denounces municipal taxes on federally funded projects

Municipal bond analyst Cate Long (LinkedIn)

By THE STAR STAFF

Municipal bond analyst Cate Long warned Monday on social media that Puerto Rico could face heightened federal scrutiny and higher reconstruction costs if municipalities continue imposing construction taxes on projects financed with federal recovery funds.

Long, who heads the research service Puerto Rico Clearinghouse, said this week that the implementation of Law 215‑2024 has opened the door for the island’s 78 municipalities to charge construction excise taxes to contractors working on federally funded projects. In comments posted on social media, she argued that taxing work paid for with federal dollars runs contrary to federal law and urged the Financial Oversight and Management Board to intervene.

Her warning comes amid a year‑long dispute between the oversight board and Puerto Rico’s two mayoral organizations over the legality and fiscal impact of the statute.

In a June 1 letter to the presidents of the Mayors Federation and the Mayors Association, the board’s executive director, Robert F. Mujica Jr., said some municipalities had already begun implementing provisions of Law 215 related to construction taxes. The board reiterated that Laws 141 and 215 of 2024 cannot be enforced until it determines they comply with the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) and certified fiscal plans.

The oversight board gave the mayoral groups until June 22 to confirm they had instructed affiliated municipalities to halt implementation and warned it could seek court action to block the laws.

Among its concerns, the board said the federal government could view the use of recovery funds to pay municipal taxes as inefficient or improper, potentially jeopardizing future allocations to Puerto Rico. It also cautioned that the taxes could increase the cost of energy reconstruction projects, reduce their financial viability, and in some cases force delays, downsizing or cancellations.

Different tax rates across municipalities, the oversight board added, could create uneven outcomes and distort where projects are located based on tax considerations rather than need or efficiency.

Law 215‑2024 amended Puerto Rico’s Municipal Code to clarify that the construction tax exemption for projects carried out directly by government agencies does not automatically extend to private contractors working on behalf of those agencies.

For projects contracted by federal agencies, the law allows municipalities to charge the tax only if federal statutes or regulations permit it -- a clause at the center of the legal dispute over whether municipalities are indirectly taxing federal funds.

The law also raises procurement thresholds for municipal projects, changes the limits for micro‑purchases, and loosens requirements for sealed bids. The oversight board argues those changes reduce competition and increase the risk of favoritism or irregularities.

Law 141‑2024, also challenged by the board, increases the threshold for public construction bids and allows agencies to bypass bidding for contracts up to $1 million during declared emergencies.

Long also highlighted that Washington‑based nonprofit Frontiers of Freedom sent a June 25 request for a coordinated investigation to the inspectors general of the Departments of Homeland Security, Housing and Urban Development, and Energy. The letter cites alleged tax‑collection efforts in Humacao and Guayama and asks federal watchdogs to determine whether recovery funds are being used -- directly or indirectly -- to pay municipal taxes, fees, fines or penalties.

The group claims such charges could represent between 5% and 10% of certain project costs. The request does not mean an investigation has formally begun.

Puerto Rico’s mayoral organizations reject the oversight board’s interpretation. The MayorsFederation argues that construction taxes have been part of municipal revenue systems for decades and that restricting them would threaten essential services and fiscal stability.

Its president, Camuy Mayor Gabriel “Gaby” Hernández Rodríguez, maintains that the tax obligation falls on private contractors, not federal agencies, and that the laws preserve competitive bidding and compliance with federal rules.

Jayuya Mayor Jorge González Otero, who leads the Mayors Association, says Law 215 did not create a new tax but clarified an authority municipalities have held since 1996. He argues that tax protections granted to public agencies do not automatically extend to private companies hired to perform the work -- and that striking down Law 215 would not necessarily eliminate the taxes.

Long has urged the oversight board to take the matter to court, as it has with other laws it considers inconsistent with PROMESA. No final judicial ruling has yet determined whether all municipal taxes imposed on contractors working on federally funded projects are unlawful.