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Excise Tax Could Be Dropped in Puerto Rico


Journal of Commerce
(Copyright 1998)

Puerto Rico is pushing two initiatives that will shake up the world of air cargo.

One, coming from a group of ruling party legislators, would eliminate a 6.6 percent excise tax on most goods entering the commonwealth, a costly and unpopular burden for shippers.

Meanwhile, Gov. Pedro Rossello's administration is moving to transfer the management of its second-busiest airport, in the northwest city of Aguadilla, to a private operator.The winning bidder is also expected to oversee the investment of hundreds of millions of dollars over the next decade, during which time Aguadilla's air cargo traffic is expected to double despite a recent falloff.



The initiatives come as Puerto Rico 's air cargo volume has grown an average exceeding 4 percent during the last two years to 804 million pounds in 1997.

San Juan's overcrowded Luis Munoz Marin International Airport shouldered nearly four-fifths of that cargo, spurring the government's attempt to decentralize air cargo traffic and remove the onerous excise tax.

The tax would be replaced by a smaller consumer sales tax, a move intended to lower consumer costs and cut costly shipping delays.

"It boils down to an issue of competitivity for Puerto Rico ," said Kenneth McClintock Hernandez, the Puerto Rico Progressive Party senator sponsoring the initiative. "For trade to improve, we have to start making sure that cargo carriers can always control their merchandise rather than ceding that control to a sub-regional agency." Shipments arriving in Puerto Rico can be delayed up to two days while inspectors from the commonwealth's Treasury Department check the goods to determine the amount of tax that needs to paid. Certain goods, such as medicines, are exempt.



The tax's removal would also head off a lawsuit being considered by the Air Transport Association to challenge the legality of taxing interstate commerce, Mr. McClintock said. The senator, and other opponents of the tax, say it violates U.S. laws that bar any interference in interstate commerce affecting shippers' pricing.

"I firmly believe that Puerto Rico 's trade restrictions violate federal law," said Jose Julian Alvarez Maldonado, United Parcel Service's legal counsel in Puerto Rico . "That law prohibits U.S. states and the commonwealth from having any law that affects service, prices, or routes of air carriers."Mr. McClintock, who sponsored a resolution approved by the legislature in February to study the potential economic effects of replacing the excise tax with a sales tax, said measures to offset the destruction caused by Hurricane Georges last month delayed his bill, which he now plans to submit early next year.

But for air cargo carriers, the savings are clear. UPS, Puerto Rico 's fourth largest cargo carrier, would alone save $7 million a year in administrative costs, Mr. Alvarez said.

The company employs 40 people at its hub in Louisville, Ky., to deal exclusively with the complex paperwork and procedures surrounding Puerto Rico 's excise tax.

"It would save money for airlines, freight forwarders, everybody out here," said Anthony Tirri, president of San Juan-based Caribbean Airport Facilities Inc. "Everybody has an extra clerk or two on board just to deal with the tax."



For Puerto Rican consumers, who are accustomed to paying the ticket price alone, a sales tax represents a jarring change. And therein lie the issue's politics.

The opposition Popular Democratic Party, which supports the continuation of Puerto Rico 's status as a commonwealth, favors as much political and fiscal autonomy as possible, short of independence.

Mr. Rossello's New Progressive Party, which favors statehood for the island of 3.8 million people, generally seeks to mold local laws to the U.S. model, and thereby eliminate legal obstacles toward its political goal.

The battle will play out during the next legislative session in January, when other tax issues are on the agenda.

Meanwhile, six qualified bidders must submit their plans to Puerto Rico 's Government Development Bank by Nov. 23 to compete for the long-term rights to manage the former Ramey AirForce Base, now called Rafael Hernandez Airport.

The 1,470-acre property in Aguadilla, now mainly a cargo airport and home to the longest commercial runway in the Caribbean, is expected to receive several hundred million dollars in infrastructure investment over the next decade.One bidder who sought anonymity said his proposal pledges $100 million in direct investment. That in turn would attract several hundred million dollars more in investments from private operators, he said.

The bidders are Borinquen Airport Facilities of Puerto Rico; Airports 3rd Millennium of Bennett, Colo.; American Port Services, of Teterboro, N.J.; Aviation Development Services LLC, of Oak Ridge, N.J.; TBI PLC of London, England; and YVR Airport Services Ltd. of Vancouver, Canada.

The winning bidder will in late 1999 take over an airport that moved 155 million pounds of cargo in fiscal year 1997, making Aguadilla the second-biggest air cargo center in Puerto Rico , followed by the southernmost city of Ponce and the southwestern city of Mayaguez. Nonetheless, the 1997 total was 17 percent lower than the prior year, after Federal Express and other carriers moved operations to San Juan, where costs are lower. In addition to the privatization, the government intends to stem that drop by granting fiscal incentives to set up shop in Aguadilla, and by improving highway transportation to the airport, said Raul Torres, Puerto Rico Ports Authority spokesman. "Aguadilla will be a major cargo facility," Mr. Tirri said. "We're nearly out of space here, and that side of the island needs to be better served."

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