EA: Fiscal board cuts essential services without touching tax incentives

By John McPhaul

The federal Financial Oversight and Management Board has cut essential services in Puerto Rico for the past five years without touching, by far, the large pocket of tax incentives that represent two-thirds (67.7%) of the total spending that affects the General Fund, although it is unknown if they produce any economic or social benefit, concludes an analysis by Espacios Abiertos (Open Spaces), a non-profit island organization that advocates for citizen participation.

Daniel Santamaría Ots, the senior public policy analyst at Espacios Abiertos (EA), said this week that tax incentives or expenses amount to $21.194 billion annually or one third (30%) of gross national product (GNP). In that line of expenses, Puerto Rico is well above other countries and jurisdictions. In the United States, they represent 8.8% of GNP, in Argentina 3.0% and in states like Massachusetts 2.6%.

Of the $21.194 billion, for example, the government of Puerto Rico will not take in $15.692 billion each year as a result of preferential rates (74% of total tax expenditures) included in the incentives provided by Law 135 of 1997 and Law 73 of 2008, the “Economic Incentives Law for the Development of Puerto Rico.”

“Why cut back on essential services such as education, health or safety and not evaluate the cost to the Treasury of all the incentives that are considered an expense for Puerto Ricans, and that it is not known if they yield the expected results?” said Santamaría Ots, an economist.

“Why have they been looking the other way for five years while their policies continue to destroy opportunities for those who decide to stay on the island? What are the double standards and what are your priorities? Austerity for whom? Who is it really intended to benefit?”

He said that for the next fiscal year (2022) the oversight board proposed austerity measures that imply, among other things, the reduction to health (of $5 million in payroll from the Department of Health, $2 million from the Diabetes Center and $1.2 million from the Cardiovascular Center), education (another $94 million from the UPR), security ($120 million for recruiting cadets for the Puerto Rico Police), essential services of the municipalities (another $44 million from the Equalization Fund) and pensioners (8.5% from pensions over $1,500).

“Fiscal responsibility should not discriminate and always fall on the shoulders of a citizenry that every year has a little more taken out of their hands for the democratic institutions and mechanisms that allowed the development of the values that forged the middle class of this country,” Santamaría Ots said.

Since May 2017, EA has identified the need for Puerto Rico, which faces the greatest fiscal crisis in its history, to disclose the “hidden budget” on what the Treasury spends or [forfeits] in tax incentives granted to individuals and corporations.

After the EA requested that information with a lawsuit that reached the Supreme Court, in September 2019 the Treasury published a report of those expenses for the first time in history, although it has not been updated. Now that part of the budget is no longer entirely hidden. However, the incentives’ performance has yet to be evaluated.

The EA contends that the report is required by law as is the case in 50 jurisdictions in the United States and highlights the model of the state of Oregon, which includes in its statutes best practices in the publication of a report on tax expenditures.

A bill for this purpose -- Senate Bill 206 -- is currently being considered in the island Legislative Assembly. The proposed statute has three main objectives: to create an annual report on fiscal expenditure or tax expenditure, establish an official public record of fiscal expenditures in open data format, and analyze the return on economic and social investment of each tax expenditure or tax incentive.

The oversight board, meanwhile, continues to extend the audited financial statements required under federal law.

Santamaría Ots pointed out that another problem facing public finances in Puerto Rico is the fact that the audited financial statements are obsolete because the most recent ones are from fiscal year 2017. This prevents the real state of public accounts from being corroborated that should justify the approval of the recent fiscal plan and the certification of the next budget for fiscal year 2022.

“Every year that passes we see how the Board continues to grant extensions for the preparation of new income projections, up-to-date audited financial statements and an updated tax expense report,” the economist stressed. “However, these concessions are absent when what is at stake are the essential services rendered by the municipalities or the country’s public university education, among others.”

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