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  • Writer's pictureThe San Juan Daily Star

Study: PR big on incentives, but not so reliant on their uncertain returns

Economist Daniel Santamaría Ots

By The Star Staff

Fiscal or tax expenditures in Puerto Rico for this year amounted to $23 billion, a number that doubles the annual general fund budget, making Puerto Rico one of the jurisdictions that proportionally offers the most tax incentives to firms.

In turn, it is one of the jurisdictions where benefits provided by these incentives are least counted on, a study published by Open Spaces (EA by its Spanish initials) on Tuesday found.

The research highlights that almost half of the special tax deals continue to be a “hidden budget” item, since it is a tax expense whose details are not known.

The Open Spaces study entitled “Fiscal Expenditures in Puerto Rico: Internal Challenges and Global Perspective” revealed that Puerto Rico is at the head of 29 jurisdictions in the United States and 92 countries globally in terms of the fiscal impact of economic incentives, also known as tax incentives or privileges, with respect to the size of its economy using both gross domestic product (21%) and gross national product (31%).

Fiscal or tax expenses are credits, deductions, deferrals, exemptions and preferential rates. In Puerto Rico there are 463 fiscal expenses but data is only reported for 53.7%. In 2017, tax expenditures represented $22.5 billion, in 2022 the figure rose to $23.2 billion and, by 2023, the island Treasury Department projects that they will reach $23.6 billion, according to its own data.

“Almost half of these special tax deals continue to be a ‘hidden budget’ item, since it is a fiscal expense whose details are not known,” said economist Daniel Santamaría Ots, senior public policy analyst at EA, who led the study developed by public policy analyst Alexis López Paleo, and that included interactive data panels created by analyst Gabriel Ríos Pérez.

Santamaría Ots noted that knowing the economic and social performance of tax expenditures is extremely important for Puerto Rico, just as it is for any jurisdiction. While the federal government has made 100% of this information public since 1974, in Puerto Rico it was not public.

Since 2017, EA has promoted the transparency of this hidden item of expenses and the incorporation of its analysis into the process of considering and approving the budget of the island government, which is carried out annually by the legislative and executive branches. EA’s call for transparency involving incentives information even reached the Puerto Rico Supreme Court.

The publication in 2019 by the Treasury Department of the first Tax Expenditure Report was historic and advanced that exercise, EA pointed out. However, the nonprofit entity said, “the report published by the Treasury — now in its third edition — still lacks much relevant information both for public officials who have the responsibility of approving the government budget and for citizens who have the right to know where public money goes.”

For the study, members of the Espacios Abiertos research division examined the “Puerto Rico Tax Expenditure Report for Tax Year 2023” presented last month by the Treasury Department, along with data from previous reports, and in comparison with other jurisdictions in the United States and other countries, to determine where Puerto Rico ranks with respect to its tax expenditures. The experts indicated that the unearned income from these special tax treatments is twice as high as the general fund budget.

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