Fiscal board questions planned sales tax suspension
Cites lack of funding source
By THE STAR STAFF
The Financial Oversight and Management Board has cautioned the Puerto Rico government against moving forward with a proposed temporary suspension of the commonwealth’s 6% sales and use tax on prepared foods, carbonated beverages, candy and confectionery products, arguing that the measure was announced without identifying how its estimated $56.8 million cost would be funded.
In a letter sent to Gov. Jenniffer González Colón, Senate President Thomas Rivera Schatz and House Speaker Carlos Méndez Núñez on Wednesday, the oversight board said it understands the government’s desire to provide relief to families and businesses facing rising electricity costs, but warned that tax relief measures should not be implemented outside a disciplined budget process. According to the island Treasury Department’s preliminary fiscal estimate, the proposed tax holiday would run from Nov. 1 through Dec. 31 and would reduce government revenues by some $56.8 million.
The board noted that the proposal was not discussed during an Oct. 21 meeting with government officials and described it as the second tax relief initiative announced this year before its fiscal impact on the certified budget and five-year financial plan had been fully evaluated. While emphasizing that the amount of money involved is not the main concern, the board said the practice of announcing tax reductions before identifying funding sources undermines fiscal discipline.
The oversight entity contrasted the proposal with the $554 million in tax relief approved earlier this year under Joint Resolution 6-2026. That package, the board said, was funded entirely from identified nonrecurring sources and was linked to commitments to create a statutory budget stabilization fund, a dedicated capital fund and a transparent five-year financial plan. Those fiscal safeguards, however, have yet to be enacted.
The board said House Bills 1391 and 1392, which would establish the stabilization and capital funds, remain pending. It warned that Puerto Rico still lacks a funded budget stabilization mechanism, a dedicated capital fund and the multiyear financial planning framework that officials previously pledged to adopt.
According to the board, the fiscal outlook has become more challenging as tax collections have remained largely flat for four consecutive fiscal years, economic growth has slowed and available surpluses have diminished. It also pointed to several financial pressures, including proposed pension benefit increases estimated at more than $230 million annually, collective bargaining agreements expected to cost more than $100 million, funding shortfalls at the Department of Education, police overtime expenses exceeding budgeted levels and uncertainty over federal Medicaid funding beyond fiscal year 2028.
The oversight board further argued that suspending the sales tax on prepared foods does not address the underlying cause of high energy prices. It said electricity costs will decline only through lower fuel costs and the addition of lower-cost generation resources, including renewable energy projects, natural gas conversions and new generation capacity. The tax suspension, it said, would provide only temporary relief while businesses continue to face elevated energy costs after the measure expires.
The letter also renewed the board’s call for comprehensive tax reform, describing temporary tax adjustments as ad hoc measures that fall short of the broader restructuring needed to simplify the tax code and support economic growth.
The board said the Treasury Department submitted a draft administrative determination for review on Oct. 27 under the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA. However, it noted that the submission does not identify a source of funds to offset the lost revenue associated with the proposal. The board said it will evaluate the measure using the same standards applied to previous tax relief efforts, including the identification of a nonrecurring funding source, consistency with the certified budget and an assessment of its impact over a five-year planning horizon.
In the letter, Robert F. Mujica Jr., the oversight board’s executive director, urged the governor and legislative leaders to enact House Bills 1391 and 1392, supplement the proposed tax suspension with a detailed funding plan, and begin a broader discussion on tax reform and long-term fiscal planning. He warned that announcing tax relief and spending initiatives before securing funding reflects the type of fiscal practices that contributed to Puerto Rico’s bankruptcy and could raise concerns among investors and credit-rating agencies.
