Fiscal board warns municipal construction taxes on federally funded projects could threaten recovery funds

The Financial Oversight and Management Board said 22 of Puerto Rico’s 78 municipalities now charge higher construction excise tax rates on projects funded with federal or local government dollars than on privately financed construction.

By THE STAR STAFF

The Financial Oversight and Management Board for Puerto Rico is urging mayors and the central government to halt implementation of Act 215‑2024, warning that recent municipal tax practices could jeopardize billions in federal reconstruction funds and undermine the island’s fragile infrastructure recovery.

In an Aug. 8 letter to Resident Commissioner Pablo José Hernández Rivera, the oversight board said 22 of Puerto Rico’s 78 municipalities now charge higher construction excise tax rates on projects funded with federal or local government dollars than on privately financed construction. In most of those towns, the rate for government‑funded work is 10% -- double or more the standard rate.

“A tax rate applied to a project because it is funded by the U.S. Government and set above the rate the same municipality applies to comparable private construction invites the question whether the incremental amount meets [federal] standards,” the board wrote.

The trend accelerated after Hurricane Maria, when federal disaster aid began flowing to the island. According to the oversight board, 20 of the 22 municipalities adopted differential rates after 2017, with 11 doing so between 2022 and 2025.

The board cautioned that the Federal Emergency Management Agency (FEMA) and other U.S. agencies could deem the higher tax rates “unreasonable” or “discriminatory” under federal cost principles, potentially making them unallowable charges to federal awards. That determination, the board noted, rests solely with U.S. awarding agencies.

The warning comes as Congress has directed FEMA to report whether municipal excise taxes are delaying disbursement of federal recovery funds, including cases where taxes were applied retroactively.

Beyond compliance concerns, the oversight board said elevated municipal taxes siphon money away from critical infrastructure projects. Contractors typically seek reimbursement for excise taxes, meaning the added cost is paid from project appropriations -- reducing the funds available for actual construction.

A recent dispute in Guayanilla underscored the risks. Siemens Energy sued after the municipality assessed $22.5 million in construction taxes and penalties on a $150 million PREPA project to install gas turbines at Costa Sur. The municipality ultimately withdrew the assessment, but the oversight board warned that aggressive tax practices could delay or derail essential energy projects.

“Puerto Rico could well have lost the critical turbines that Siemens might instead have installed elsewhere,” the letter noted.

Act 215‑2024, which amends the Municipal Code, raises additional red flags, the oversight board said. The law attempts to remove tax exemptions long applied to government entities such as PREPA -- exemptions already recognized by Puerto Rico courts. It also raises procurement thresholds, doubling the value of projects that can bypass sealed bids and tripling the limit for no‑bid micro‑purchases. The board argues this weakens safeguards at a time when numerous mayors have faced federal corruption charges tied to public works contracting.

The oversight board has formally directed the government not to implement Act 215 until it receives required fiscal impact analyses under the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA. To date, the government has not provided those estimates.

While acknowledging municipalities’ fiscal challenges, the board stressed that disaster‑recovery funds were never intended as a new revenue stream. Elevated excise taxes, it said, represent a one‑time windfall that cannot support long‑term budgeting -- and could ultimately cost municipalities far more if federal agencies restrict or claw back funding.

Instead, the board urged mayors to focus on recurring revenue sources, including stricter enforcement of municipal license taxes and improved property‑tax collection.

The oversight board added that it remains ready to work with the island government and municipalities on “a solid, enforceable, and practical solution” that protects federal funds and ensures reconstruction projects proceed without unnecessary costs or delays.