Fiscal board opposes construction tax expansion

The Financial Oversight and Management Board said it shares concerns that Act 215-2024 could raise costs for critical infrastructure and reconstruction projects, particularly those financed with federal disaster assistance.

Warns federal recovery funds could be jeopardized

By THE STAR STAFF

The Financial Oversight and Management Board for Puerto Rico has reaffirmed its opposition to the implementation of Act 215-2024, saying the measure could increase the cost of federally funded reconstruction projects and potentially threaten billions of dollars in disaster recovery aid flowing to the island.

In a letter to Rep. Paul Gosar (R-Ariz.), chairman of the U.S. House Natural Resources Subcommittee on Oversight and Investigations, Robert F. Mujica Jr., the oversight board’s executive director, said the board has directed the Puerto Rico government and municipalities not to implement the law while it reviews whether the measure complies with the oversight framework of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA).

Act 215 amended Puerto Rico’s Municipal Code by preventing private contractors working for tax-exempt public entities, such as the Puerto Rico Electric Power Authority (PREPA), from relying on those entities’ tax exemptions. If enforced, the law would allow municipalities to collect construction excise taxes from contractors performing work on public projects funded by either the Puerto Rico government or the federal government, even when the public entity owning the project is itself exempt from taxation.

The oversight board said it shares concerns that the law could raise costs for critical infrastructure and reconstruction projects, particularly those financed with federal disaster assistance. The board noted that it warned the Puerto Rico government in late 2025 that Act 215 could not be implemented until officials demonstrated that it complied with PROMESA and applicable fiscal plans.

According to the letter, the board repeatedly sought assurances that municipalities were not enforcing the law. After receiving incomplete responses from the government, the board contacted several municipalities directly. Two municipalities that had amended their ordinances to reflect Act 215 reportedly assured the board they would not implement the law, while a third municipality failed to respond.

The board also warned Puerto Rico’s mayors in June that it retained the authority under PROMESA to take action to nullify or prevent enforcement of Act 215 if necessary. Although it has not yet pursued litigation, the board said that option remains available if municipalities begin implementing the challenged provisions and cooperative efforts fail.

At the same time, the oversight board argued that repealing Act 215 alone would not solve a larger problem. Municipalities have possessed authority to impose construction excise taxes for decades, and some have increasingly adopted higher tax rates for government-funded projects than for comparable private developments. The board described this practice as a growing concern that predates Act 215.

Its review found that 22 of Puerto Rico’s 78 municipalities currently impose higher construction excise tax rates on government-funded infrastructure projects than on privately funded construction. In 15 municipalities, government-funded projects are charged a 10% tax rate, often double or more than double the rate applied to similar private-sector projects.

The board said the trend accelerated after Hurricane Maria in 2017, when Puerto Rico began receiving substantial federal disaster recovery funding. Twenty of the 22 municipalities with differential tax rates adopted those provisions after the storm, and more than half enacted higher rates between 2022 and 2025.

While construction-related taxes exist elsewhere in the United States, the board said it has not identified another jurisdiction that taxes projects differently based solely on whether they are publicly or privately funded. Officials expressed concern that imposing higher taxes on federally funded projects could ultimately be deemed a misuse of federal disaster aid.

The board acknowledged that it does not yet have sufficient data to calculate how much federal funding has been used to pay municipal construction excise taxes. Municipal financial reports do not separate tax revenue generated from federal, commonwealth and private projects, making a comprehensive assessment difficult.

Nevertheless, officials cited examples illustrating the potential magnitude of the issue. One involved Siemens Energy’s approximately $150 million project to provide generators for PREPA’s Costa Sur Power Plant. The Municipality of Guayanilla assessed roughly $7.5 million in construction excise taxes, along with a $15 million penalty and some $900,000 in municipal license taxes. Those assessments were later withdrawn, and no municipal taxes were ultimately paid for the project.

The oversight board is also examining claims that tax revenue generated from major construction projects may have been used for expenses unrelated to reconstruction. However, because construction tax receipts are generally deposited into municipal general funds rather than segregated accounts, the board said it cannot currently determine how specific revenues were spent.

The letter referenced reports that one municipality may have used some $4 million in construction tax proceeds to support police operations and that the Municipality of Humacao entered into contracts worth nearly $500,000 for festivals, entertainment and production services. The board said it cannot confirm whether those expenditures were funded by construction tax revenues tied to federally financed projects, but added that the allegations are part of its ongoing review.

The oversight board also addressed concerns regarding retroactive taxation of contractors that helped restore essential services after hurricanes Irma and Maria. It stressed that Act 215 does not apply retroactively and has no effect on taxes imposed before its enactment.

However, the board acknowledged ongoing disputes involving Cobra Acquisitions LLC, which has faced tax collection efforts from roughly a dozen municipalities for work performed for PREPA between 2017 and 2019. Puerto Rico appellate courts have issued conflicting rulings on whether those taxes are lawful under the Municipal Code as it existed at the time, and the Puerto Rico Supreme Court has not yet resolved the disagreement.

The board said it is monitoring the situation and evaluating whether any aspects of the controversy raise concerns under PROMESA. It also pointed to language included by the U.S. House Committee on Appropriations that would require the Federal Emergency Management Agency (FEMA) to report on whether local construction excise taxes, including taxes imposed retroactively, are delaying the distribution of federal reconstruction funding.

In its conclusion, the oversight board delivered a sharp criticism of the existing municipal tax structure. It argued that charging higher construction excise taxes on disaster recovery projects than on comparable private developments is poor public policy because it increases costs, discourages investment, undermines efforts to secure federal funds and slows reconstruction efforts.

The board said it intends to work with Puerto Rico’s government and legislature on a territory-wide legislative solution that would eliminate the disparate treatment of government-funded projects and align Puerto Rico’s construction tax practices more closely with those found elsewhere in the United States.

Until that review is completed, the Oversight Board said Act 215 should remain unenforced and that any actions taken to implement the law should be reversed.