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Tax Reform Debate Heats Up

With less than 20 days to go before elections, Popular Democratic Party reneges on implementing sales tax


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

The consensus was too good to be true. Just when people thought politicians from the Popular Democratic Party (PDP) and the New Progressive Party (PNP) had agreed on a proposal to implement a local sales tax as part of sweeping tax reform, the PDP General Counsel and the PDP’s gubernatorial candidate Anibal Acevedo Vila announced last week that they would oppose its implementation.

The excise tax is a broad-based tax on consumer goods that is imposed at points of entry (ports, airports). A value-added tax (VAT) is a tax imposed on the added value of merchandise as it passes through the supply chain, from manufacturer to distributor to wholesaler to retailer to consumer. (This is known as a cascading effect.) With a sales tax, customers have to pay tax when they buy products at stores.

In a televised message earlier last week, Acevedo Vila indicated that if elected in November, he and his party would evaluate the current excise-tax system and consider other alternatives, but not a sales tax, claiming that such a system would be an additional burden on the poor and the middle class.

PNP gubernatorial candidate Pedro Rossello had proposed the sales tax to replace the 50-year-old, 6.6% excise tax or <I>arbitrios</I> system. Acevedo Vila’s statement surfaced just weeks after the completion of a tax-reform study by stateside firm Bearing Point, which was commissioned by the Puerto Rico Treasury Department (Hacienda), 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.

In March, the State Society of Certified Public Accountants (Society of CPAs) made public their sales-tax study, which recommended a sales tax as part of a comprehensive tax reform that included the elimination of the obsolete arbitrios system.

Coincidently, the PDP-controlled Legislature approved legislation last month that will guide the tax reform proposed by the current administration. The legislation calls for the replacement of the current excise-tax system with another tax option but without specifying which.

As outlined in the legislation and CARIBBEAN BUSINESS (CB Dec. 11, 2003), one of the main reasons tax reform is being pushed is that the current system is unable to collect from the informal economy, thus increasing taxpayers’ liabilities, promoting tax evasion, and causing budget shortfalls. Economists, business leaders, government agencies, the Legislature, politicians, and tax experts are firmly backing the reform, as are professional organizations such as the Puerto Rico Chamber of Commerce, United Retailers Association, the Chamber of the Food Marketing & Distribution Industry, and the Puerto Rico Automobile Distributors Association. These organizations all support a sales tax.

If necessary, the recently approved legislation will implement a reimbursement system for low-income people, retirees, and recipients of state or federal social assistance.

Hacienda’s evaluation of the Bearing Point study is expected to be completed before the end of the year, since tax reform legislation must be passed next year to implement tax reform starting Jan. 1, 2006, as outlined in the legislation.

"The reason we oppose the implementation of a sales tax is that it will make everything more costly. The sales tax, imposed on all consumer goods, becomes a greater tax burden on those least able to pay: the middle class and low-income individuals," said State Rep. Francisco Zayas Seijo, chairman of the House tax commission and one of the PDP’s strongest supporters of tax reform.

The sales tax, said Zayas Seijo, represents a threat to retirees and pensioned employees, who have paid their taxes, as it would dip into their Social Security and pension checks; it would also hurt single mothers who depend solely on government assistance.

"Besides the sales tax, the only thing...Rossello has in his platform relating to tax reform is eliminating the marriage penalty and the excise-tax increase imposed on sport utility vehicles, and increasing tax exemptions for pensioned taxpayers," said Zayas Seijo, who added that, in Rossello’s platform, tax-exemption limits are raised for taxpayers age 60 or older from $11,000 to $15,000 and for those under 60 from $8,000 to $11,000. "He doesn’t offer to reduce taxes for salaried, middle-class, or low-income people."

Untrue, said State Rep. Jose Aponte.

"He’s trying to fool people by saying he won’t implement a sales tax because it means more taxes. But he isn’t telling the truth because a VAT will be an additional tax burden on taxpayers," said Aponte. "What Acevedo Vila doesn’t explain in his party’s that an indirect VAT is similar to the current <I>arbitrios</I> system in that it has a cascading effect. The only difference [between the VAT and <I>arbitrios</I>] is that, [with VAT], the government would have to establish intermediate supervisory points to ensure the tax is applied along the supply chain," said Aponte. "With a sales tax, people would pay less."

Other elements of the NPP’s platform, added Aponte, include the establishment of a local earned-income credit to benefit families earning gross incomes of less than $15,000 a year. Puerto Rico will also be included in the federal Earned Income Tax Credit (EITC), Supplemental Social Security (federal income supplement program funded by general tax revenue), and Historically Underutilized Business Zone programs (which promote small businesses), to name a few.

Under the Rossello administration, Aponte said taxpayers saved an average $1,800 a year in taxes as a result of the administration’s tax reforms. In contrast, the present administration has imposed an average $3,000 a year in new taxes to taxpayers.

Higher taxes mean more tax evasion, which translates into fewer tax collections for the government, explained Aponte.

"It must be noted that the excise-tax system is a sales tax that all consumers pay when they purchase a product, but with the cascading effect, the original 6.6% can turn into 18%, which customers pay when they buy merchandise, even though the government only receives 6.6% of the amount," explained Aponte.

This Caribbean Business article appears courtesy of Casiano Communications.
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