Fiscal board recommends property tax system changes

By John McPhaul

The Financial Oversight and Management Board (FOMB) announced over the weekend that it has submitted a series of recommendations to the Puerto Rico government to implement legislative changes that would improve the island’s property tax system so that it becomes fairer and more efficient.

The oversight board recommends broadening the tax base by eliminating or reducing exemptions, measuring the tax base by the real market value of the properties instead of the last appraisals of real estate values in 1957, and reducing the statutory contribution rate.

The board made the recommendations in a letter dated Aug. 26 and addressed to Gov. Wanda Vázquez Garced, Senate President Thomas Rivera Schatz, and Speaker of the House of Representatives Carlos Méndez Núñez.

“The property tax system in Puerto Rico is not up to date and the recommendations provide for a more transparent tax system,” said Natalie Jaresko, the executive director of the oversight board, in a written statement.

“The people of Puerto Rico deserve a modern tax system based on the principles of justice and equity,” she added. “All property owners must pay their fair share of taxes, not just those who cannot claim exemptions.

“Meanwhile, municipalities are in a very difficult fiscal position and property taxes represent the most important source of revenue. Reforming the property tax laws would stabilize the municipalities’ finances and help pay for the much-needed services they provide to the people of Puerto Rico.”

Section 205 of the Puerto Rico Oversight, Management and Economic Stability Act gives the oversight board the power to present recommendations to the governor or the island Legislature to promote financial stability, economic growth, and the efficiency of government services. The recommended reforms consider the following four categories for changes:

Reduce exemptions: The existing property tax system is outdated, confusing and unfair. There are more than 26 general exemptions and exemptions under the Municipal Code, in addition to additional exemptions, including those directed at economic development.

Establish a market value base for property valuation: 58 percent of the tax base of real property in Puerto Rico is exempt from taxes. Switching to a market-based system would establish a more equitable distribution of property taxes.

Impose appropriate property tax rates: Property tax rates of more than 10 percent are high and only feasible due to the extreme under-evaluation of the property for tax purposes in the current system. These regulatory rates translate into actual effective tax rates that are substantially less than 1 percent for residential and commercial real estate. Puerto Rico should improve the uniformity of the effective tax rate on residential property and evaluate the increase in the effective tax rate for commercial property.

Use classification to transparently vary effective tax rates: Unlike in Puerto Rico, in most state and municipal property tax systems in the United States, taxes vary based on commercial, industrial, residential, and agricultural property. To improve transparency, equity and efficiency, the oversight oard recommends that Puerto Rico vary tax rates on different types of property.

The recommendations correspond to the measures of the fiscal plan of the Municipal Revenue Collections Center (CRIM by its Spanish acronym) that the board certified in June.

The Certified Tax Plan outlines 10 steps for CRIM to increase tax revenue collected without increasing the tax rate, broaden the tax base by adding properties that were tax-free, and update appraisals to reflect property improvements and make it easier for homeowners to pay taxes.

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