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Stop Politicking With Puerto Rico’s Economic Development


October 21, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Was it too good to be true?

After three and a half years of painstaking work, a consensus had been forged among broad sectors of society on the need to replace our archaic excise tax (arbitrios) system with a point-of-sale tax, be it a sales tax or a value-added tax (VAT).

Business leaders, business associations, professional associations, economists, tax experts, and even legislators from opposing political parties had come to understand the long list of reasons why a sales tax or VAT in lieu of (arbitrios) was the best thing for Puerto Rico’s economic development. The Puerto Rico Chamber of Commerce, United Retailers Association, the Chamber of Food Marketing, Industry & Distribution, and the Puerto Rico Automobile Distributors Association have all come out in support of a sales tax.

Now, with scarcely three weeks to go to an election, Popular Democratic Party (PDP) gubernatorial candidate Anibal Acevedo Vila has thrown a monkey wrench into the process that threatens to set it back again for years.

In a televised message early last week, Acevedo Vila lambasted New Progressive Party gubernatorial candidate Pedro Rossello’s proposal for a sales tax to replace the decades-old, 6.6% excise tax (arbitrios) system.

For years, the idea of a sales tax had been anathema to the PDP, which has used the issue on its laundry list of arguments against statehood. "If statehood comes, we will all be forced to pay a sales tax on everything we buy," the pro-commonwealth party has traditionally argued.

This is pure demagoguery of course, an effort to scare the masses. Informed voters know each state decides how to set up its internal tax-collection system. A sales tax is strictly a state tax matter that has nothing to do with statehood or with the federal government. In fact, a number of states don’t have a sales tax at all. Still, the threat has been powerful enough over the years to make politicians of either party not want to touch the issue with a 10-foot pole.

When CARIBBEAN BUSINESS interviewed Puerto Rico Treasury Secretary Juan Flores Galarza early in the new administration’s term, we saw an opening.

"The issue has been discussed for years," Flores Galarza told CB (March 8, 2001). "It shouldn’t be a political issue, but it always ends up becoming one. Studies have been done on this. I don’t close my mind to anything, and it is my responsibility to evaluate everything, read existing studies, and make recommendations."

Sure enough, just recently, stateside firm Bearing Point completed a tax-reform study commissioned by the Treasury Department to evaluate the possible implementation of a sales tax or a VAT in Puerto Rico. The contents of the study haven’t yet been made public. Now, with Acevedo Vila’s demagogic attack on the sales tax, perhaps we have a clue about why the recommendations of the study haven’t been made public.

The issue got a fair hearing even in the PDP-controlled Legislature, led by House Treasury Committee Chairman Francisco Zayas Seijo. In fact, last month, the Legislature approved legislation that will guide the tax reform proposed by the current administration, calling for a replacement of the current excise tax system.

Now, Zayas Seijo, who is running for mayor in Ponce, has made a fool of himself by candidly admitting to the press that he is backtracking on his own committee’s recommendations on the subject because of instructions from PDP headquarters—i.e., Acevedo Vila.

There’s a long list of reasons why a point-of-sales tax is infinitely better than the present excise tax (CB Dec. 11, 2003). One of the main reasons is that our current tax system is unable to collect from the informal or underground economy, which imposes an overburden on those of us who do pay our income taxes.

Whether in the form of a sales tax or a VAT, a point-of-sales tax must replace our archaic excise tax (arbitrios) system. It would be the best thing for Puerto Rico’s economic development. Against all odds, we seemed to be moving in the right direction.

Now, if we could only make politicians stop politicking with issues that are really important!

This Caribbean Business article appears courtesy of Casiano Communications.
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