Fiscal board: PR’s 2018 Tax Expenditures Report is inadequate on top of being too late
By The Star Staff
The Financial Oversight and Management Board blasted the Puerto Rico’s Tax Expenditures Report for Tax Year 2018, informing Treasury Secretary Francisco Parés Alicea that the report, which was submitted over the summer, is untimely and has failed to live up to its potential for providing policy insight and guidance to ensure fiscal sustainability.
Among the issues highlighted by the oversight board were that the magnitude of tax expenditures dwarfs their use in international, national and comparative U.S. state experiences. The total magnitude of tax expenditures for 2018 is $21.4 billion. Two-thirds of these are in the form of preferential tax rates for foreign-owned manufacturing companies. While more than 100 new tax expenditures for non-corporate businesses were added to the report, the reported sum of tax expenditures had declined slightly between 2017 and 2018 (by some $900 million), the oversight board said.
That decline was driven primarily by a $1.8 billion reduction in the combined incentive costs of Act 135-2014 (Young Entrepreneurs Incentive and Financing Act) and Act 73-2008 (Economic Incentives for the Development of Puerto Rico Act). In 2018, the total for all other categories of tax expenditures showed a net increase, except for a 0.7% decline in traditional excise tax expenditures, the oversight board said.
“Puerto Rico is far too reliant on tax incentives as a tool for incentivizing development and the magnitude of incentives offered through the tax code is introducing heavy distortions and nonuniformity into the tax system and significantly contributes to the development of an unfriendly underlying tax regime,” the board said.
The oversight board also noted that the report was submitted June 1, 2021, covering the 2018 tax year.
“The age of these estimates and their availability only 30 days before the beginning of the 2022 fiscal year significantly limit their utility for budget policy,” the board said.
Tax expenditures also need to be rationalized both with regard to their intended purpose and in relation to direct expenditure programs of a similar nature. The tax incentives and direct expenditures programs of the Puerto Rico government should be viewed jointly as an economic development tool and analyzed to eliminate nonproductive, inefficient, duplicative, distortionary and unnecessary tax expenditures, the board said. All existing tax expenditures should face a requirement that they be reviewed and rejustified and only those for which there is a compelling and decisive demonstration of merit should be retained. Review should be continuous, the board said.
The oversight board also noted that the tax expenditure report is incomplete. The tax expenditures under Act 154, a 4% tax imposed on certain corporations, remain excluded despite past assertions that they are accounted for as erosion to the corporate income tax base.
Equally important, commonwealth grants of property tax and municipal license tax incentives are also not included, the oversight board said. Those should be incorporated, reflecting their full value in the form of property tax revenue lost and municipal license tax revenue lost to both the commonwealth and municipalities, the board said.
The board also noted that the tax expenditure report is nonactionable. For the inventory and estimates provided in the report to be of value, they must be integrated into the planning, budget and policymaking processes. Tax expenditure reports provide information and insight that can valuably assist the government and Legislature in identifying resource commitment and policy priorities that can only be of benefit for the budget development and approval process, the oversight board noted.