The Little Guys Are Paying For The Big Numbers In This Year’s Budget

by John Marino

May 24, 2002
Copyright © 2002 THE PUERTO RICO HERALD. All Rights Reserved.

. JOHN MARINOIt was not until Wednesday that Puerto Rico found out that Gov. Calderón had quietly signed into law the week before a measure boosting the tax on cigarettes.

The 75-cent a pack cigarette tax hike, which was sold publicly as a way to defray the costs of health reform, is the least offensive of the Calderón administration's package of excise tax hikes aimed at plugging a more than $500 million shortfall in next fiscal year's proposed budget, which begins July 1.

So it's a measure of just how unpopular the governor's tax increases are that she would sign off on the cigarette tax without an utterance. ?

Further measures boosting taxes on alcoholic beverages and sports utility vehicles were also supposed to be sent to La Fortaleza last week but got snagged when Popular Democratic Party Sen. Sixto Hernández refused to sign a conference committee report containing the bills, a protest over what he called inadequate public hearings on the issue.

They are expected to be ready for the governor's signature later this week.

Interestingly, the governor's signing of the bills occurred smack in the middle of a nine-day period in which she dropped from public view. Perhaps, she originally planned to sign all the tax bills into law during that time.

"That's a sign of a guilty conscience," said Puerto Rican Independence Party Sen. Fernando Martín, of the move.

Calderón, who reappeared publicly Wednesday, admitted she made a mistake, saying she should have at least sent out a press release announcing that the measure had become law. And she vowed that she would not sign a bill into law again without a public announcement.

The administration seems to have been caught off guard by the criticism of her proposed excise tax hikes, which she called a "tough decision" she had to make because of the sorry state of government finances she inherited from the previous administration.

That opposition translated into mediocre public approval ratings the governor received in a newspaper poll last month during the height of the debate over her tax increases. Administration officials blamed the poor numbers partially on discontent over the measures.

Popular Democratic Party lawmakers, feeling the heat from industry lobbyists, actually trimmed Calderón's proposed "sin tax" hikes on cigarettes and alcoholic beverages -- the one significant victory they have won over the administration.

Interestingly, before appearing publicly on Wednesday, the governor the day before ordered the Justice Department to investigate findings in a Comptroller's audit that found that the Rosselló administration had unjustifiably inflated government revenue estimates by $112 million during the 2001 fiscal year, which ended June 30, 2001.

The message was her predecessor was to blame for her decision to raise taxes-- and it's a message being increasingly lost on Puerto Rico voters. Whatever shenanigans that might have been pulled with the budget numbers in 2001, it now seems like ancient history.

Part of the discontent over the tax increases is that there is a sense that the government is not doing enough itself to rein in spending during these tough economic times.

Indeed, the Calderón budget proposes spending $21.8 billion during the 2003 fiscal year, which starts July 1, a healthy 5.8 percent increase over this year's spending.

To the tune of $180 million, the Calderón budget grants the central administration's approximately 150,000 workers a $100 monthly pay hike -- despite warnings by island economists that it just doesn't have the cash and continuing complaints by labor leaders that the raise is not enough to satisfy them.

In large part, the Calderón tax hikes are hitting the island's lower and middle classes much harder than the rich.

Coupled with the sin taxes is an increase in lottery games, which historically have been played by those who can least afford them.

New IRA rules allow residents to withdraw money from August to October at a special tax rate of 10 percent. Another change allows residents to prepay taxes on IRA accounts at the special rate.

The move, designed to raise about $50 million in tax revenues, could be a bad incentive to workers to raid their retirement accounts and throw their futures in jeopardy. By allowing residents to "pre-pay" taxes at a special rate, the government is also borrowing off its future earnings -- which is also not a good move.

Even the planned tax hike on sports utility vehicles will likely hit the financially squeezed middle class as hard as the upper classes in car-crazy Puerto Rico.

Before raising taxes, Calderón repealed programmed tax cuts in order to plug the budget shortfall. The third phase of the Rosselló administration tax reform, to go into effect this year, would have sliced 1 percent off all tax brackets except the highest, and Calderón put off a "marriage penalty tax repeal" that would have provided $80 million in relief to married couples who both work - a now dominant trait among the island's middle class.

Indeed, the one tax cut that Calderón did enact is a slashing of the corporate and individual capital gains rate in half -- a fact that adds to the perception that the little guys are paying for the big numbers in this year's budget.

John Marino, City Editor of The San Juan Star, writes the weekly Puerto Rico Report column for the Puerto Rico Herald. He can be reached directly at: Marino@coqui.net

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