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  • Writer's pictureThe San Juan Daily Star

Fiscal board opposes governor’s recent tax reform proposal

Gov. Pedro Pierluisi

By The Star Staff

The Financial Oversight and Management Board came out Sunday against the tax reform proposal unveiled recently by Gov. Pedro Pierluisi because of what it said would be the high cost to the public coffers.

The proposed tax reform would reduce tax rates for individuals and companies with a fiscal cost of $474.4 million. About 60% of the tax relief is for corporations. It comes at a time when Puerto Rico is still exiting bankruptcy.

“Our analysis points to far greater costs than the governor’s current estimates,” the oversight board said in a written statement. “Any potential tax reform must be fiscally responsible, meaning it cannot lose revenues in the process that are necessary to fund essential services. Therefore, any tax reform or tax law initiative must be revenue neutral. Further, any tax reform must reduce the tax system’s complexity, work to attract new investment without harming local businesses, and incentivize Puerto Rico’s business to expand and hire.”

The oversight board said tax reform must be essential to sustainable economic growth, comprehensive, holistic, and for the long term. The board added that it has been in ongoing discussions about the proposal’s effect.

The governor’s proposed tax reform, unveiled last week, would reduce the tax rate for individuals with a yearly income of $41,501 to $61,500 to 22% from 25%, a 3% reduction that may benefit some 30,000 taxpayers.

Taxpayers earning $61,501 to $81,500 a year would enjoy a 22% tax rate, an 11% reduction from the current 33% rate. The cut would benefit another 30,000 taxpayers.

Likewise, some 40,000 taxpayers with net incomes from $81,501 to $300,000 would enjoy a 30% tax rate, down from 33%. The fiscal impact of the proposed tax changes for some 100,000 taxpayers was estimated at $153.2 million.

The bill maintains the cost of living adjustment, which had been introduced in January and will begin in the taxable year 2024.

The proposed tax reform would grant incentives to doctors, who will be exempt from paying taxes on the first $40,000 of gross income generated for a period of five consecutive taxable years.

The measure would extend certain benefits of what was known as Act 22-2012 to local investors, granting them tax exemptions on the income of dividends, interest and capital gains from the purchase and sale of securities and businesses.

The fiscal impact of those two benefits is estimated at $35.5 million and all the individual tax changes proposed in the measure have the potential to benefit nearly 630,000 taxpayers.

The governor said 22,000 companies would benefit from lower tax rates.

The bill would reduce the tax scales from six to three depending on income, lowering the maximum rate, which now reaches 37.5%, to 33%. For corporations with net income up to $275,000, the marginal rate would be 17%.

For corporations with net income from $275,000 to $3 million, the marginal rate would be 27%, and for corporations with net income of $3 million and over, the rate would be 33%. In total, some 22,000 companies would benefit, receiving savings of more than $283.6 million.

Oversight board officials said they will continue to work with the governor and the Legislature toward a truly comprehensive tax reform that can contribute to Puerto Rico’s competitiveness as a critical part of its economic development.

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