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  • Writer's pictureThe San Juan Daily Star

Economic incentives have cost gov’t over $16 billion in tax expenditures

Treasury Secretary Francisco Parés Alicea

By The Star Staff

Economic incentives for businesses cost Puerto Rico’s government $16.3 billion in tax expenditures as of tax year 2023, a figure that should reach $16.5 billion in tax year 2024, according to a government report.

Treasury Secretary Francisco Parés Alicea announced Wednesday the publication of the fourth Tax Expenditure Report (TER) for the taxable year 2024 as required by the commonwealth Fiscal Plan that the Financial Oversight and Management Board certified in April.

Tax expenditures are revenue losses attributable to provisions of Act No. 1 of Jan. 31, 2011, the Internal Revenue Code for a New Puerto Rico, that deviate from the tax structure’s benchmark law. The revenue loss could be due to a special exclusion, deduction, exemption, credit, preferential rate of tax, or a deferral of tax liability.

A tax expenditure comes from the government’s use of the tax system to pursue policy goals such as encouraging savings, stimulating employment, stimulating economic activity, encouraging foreign investment and protecting national industries. In such circumstances, the tax system fulfills a role like a spending program; however, unlike a spending program in which taxes are collected and spent by the government, a tax expenditure reduces revenues when the taxpayer engages in activities that further the policy goal.

Like any other tax law, incentive acts result from legislation passed by the Puerto Rico Legislature and signed by the governor. The incentive acts generally lower the tax rate applicable to businesses whose operations qualify thereunder and sign an agreement thereof with the island government. The $16 billion-plus cost comes from the Economic Incentives for the Development of Puerto Rico & Act 60.

The incentive acts are designed to encourage economic activity in Puerto Rico and the tax benefits provided qualify as tax expenditures.

The report, meanwhile, lists some 432 tax expenditures in total. It also notes that the government projected $269 million in tax expenditures under Act 20-2019, the Export Services Act, for tax year 2023 and the number should go to $272 million in 2024.

The cost of Act 22-2012, the Transfer of Investors to Puerto Rico Act, was projected at $648.9 million for 2023 but the number should grow to $652 million in 2024.

“We remain consistent with our commitment to informing citizens regarding the administration of public funds, in this case, about the tax benefits granted by the government to individuals, groups, and sectors that represent economic activities that promote the development and social welfare of the citizenry,” Pares Alicea said in a statement Wednesday.

The Treasury chief noted that in mid-June, the audited financial statements corresponding to fiscal year 2021 were also published, an effort that was positively received by the credit rating agency Fitch Ratings, as previously reported by the STAR.

He said tax expenditures are the counterpart of regular expenditures presented in the general government budget and complete the picture of government investment in public policy objectives.

It was the fourth Tax Expenditure Report issued by the Treasury Department. The first report, corresponding to the taxable year 2017, was published in June 2019. The second, corresponding to taxable year 2018, was published in May 2021, and the third, with the cost estimates from 2017 to fiscal year 2023, was published in March 2022.

Among other things, The TER “provides a definition for ‘tax expenditures,’ describes the method used to identify tax expenditures, and provides a list of tax expenditures with estimates of their cost,” the report says. “New estimates are provided for the cost of tax expenditures for the tax years 2021 through 2026, under tax laws in effect in year 2021.”

“This TER also includes revised estimates for the tax year 2020, for the major tax regimes in Puerto Rico,” it notes.

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