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  • Writer's pictureThe San Juan Daily Star

CRIM says repeal of personal property tax, property tax exemptions to hurt cities

Executive director of the Municipal Collection Center Reinaldo Paniagua Látimer.

By The Star Staff

The executive director of the Municipal Collection Center (CRIM), Reinaldo Paniagua Látimer, stated Tuesday that the proposed repeal of the inventory tax, as suggested by the Financial Oversight and Management Board, will directly impact the pockets of 800,000 citizens as it will repeal exemptions to property taxes.

“Neither the people nor the municipalities benefit; on the contrary, what they accept is a mortal blow because the taxpayer will continue paying the same or perhaps higher prices, and a powerful economic blow is expected for the municipal coffers,” he said.

“This suggestion that the FOMB makes, through its executive director, to not just eliminate the inventory tax without a clear idea, a clear solution of how you are going to do it in a way that they mention in a neutral way that does not there are losses for the municipalities; He goes further and suggests the elimination of the personal property tax in its entirety, it is a negative in all its areas,” he said.

He said cities will not be able to take the blow of eliminating personal property tax in its entirety, which constitutes $490 million for the municipalities in the last tax cycle.

About 60% of the houses that are registered in the CRIM, or 800,000 structures, enjoy exemption for being their main residence. So, of those 777,000 people to be exact, 586,000 something; They do not pay absolutely anything and those who are above the tax value of $15 dollars, will pay something, because they are over the limit. Those who do not pay are going to be forced to pay and those who pay are going to be forced to pay more, he said.

As the STAR first published, the Financial Oversight and Management Board said it supports the repeal of the inventory tax and of personal property taxes, which is the tax generally imposed on certain assets that can be touched and moved, such as cars, livestock, or equipment as long as alternatives to eliminate them are revenue neutral.

The FOMB made its remarks in a letter to House Speaker Rafael Hernandez concerning House Bill 1692, which proposes a new methodology to calculate the inventory tax, and House Bill 1798, which also proposes changes to the inventory and personal property taxes. The FOMB Puerto Rico’s relatively heavy reliance on inventory and personal property tax is an outlier compared to that of U.S. states.

“The Oversight Board considers the repeal of the inventory to be a significant step toward improving the business climate of Puerto Rico, as it could allow businesses to build up inventory without a tax penalty,” the Board said. The tax has been eliminated in 36 states while 14 states have inventory taxes lower than Puerto Rico.

“That said, any effort by the Government to eliminate the inventory tax in Puerto Rico must be budget-neutral for both the Commonwealth and the municipalities. The inventory tax accounts for $237 million of the total $447 million of personal property tax collections and constitutes a significant source of revenue for municipalities,” the Board said in the September 29 letter.

Repealing or reforming inventory taxes would disproportionately affect certain municipalities— particularly 13 municipalities where more than 10% of their general fund budget comprises such revenues.

After reviewing the Bills and having analyzed the tax system and ways it can be improved, the Oversight Board made a number of recommendations regarding the process contemplated by the Bills. The Oversight Board supported having a commission or group assess potential options for reform and to propose reforms for the Legislature to consider and adopt. As part of that approach, the Oversight Board believes a temporary freeze of the inventory tax to allow a commission or group time to identify a sound approach that eliminates the inventory tax and maintains municipal revenues.

It also suggested a number of factors that should be carefully considered before implementing a temporary freeze. First, the Government should establish a base period to determine the tax liability during the freeze. Second, the freeze period should be long enough to allow time for the commission or group to thoroughly develop long-term permanent options and provide recommendations, and third, the commission or group should be provided with very clear steps to guide it and take into account the uneven impacts that the freeze will have on certain municipalities. Finally, the Government should clearly specify consequences if inventory tax replacement or other structural reform recommendations are not enacted to avoid the circumstance where taxpayers that have built up inventories during the freeze period face significant tax liabilities when the inventory tax is reinstated.

With these considerations in mind, the Board said House Bill 1798 is closer than HB 1692 to meeting the criteria because it includes a base period, a five-year freeze period; different calculations for existing and new firms; and a 7-member board with a timeline to provide a recommendation for a permanent reform.

“However, we recommend that HB 1798 be amended either to encourage the permanency of the reform or to reduce the impact on taxpayers and CRIM without significantly reducing revenues.

One option to amend HB 1798 would be to include a “hold harmless” provision for those municipalities which are heavily dependent on inventory tax for revenues,” the Board said.

One option for reform is Puerto Rico’s real property tax system given that the tax is currently constrained due to exemptions and exonerations. Further reform of the real property tax system may provide the revenue needed to make up for and thus eliminate personal property taxes.

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