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Don’t Repeal Excise Tax On Autos


March 17, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

It seems Puerto Rico’s enthusiasm for cars is showing no signs of slowing down. On average, over 11,000 new vehicles were sold every month during 2004, with the year ending with 134,391 vehicles sold. While 2005 may not achieve the same levels of auto sales as 2004, it still promises to be another good year for Puerto Rico’s car industry.

New models, low interest rates, special financing deals, and manufacturers’ rebates all contributed to Puerto Rico’s record auto sales last year, in spite of the slow economy and the additional excise taxes imposed by the Sila Calderón administration on certain vehicles in June 2002.

When the new excise tax was imposed on luxury and sport utility vehicles (SUVs), auto industry executives feared it would have a negative impact on Puerto Rico’s car sales. The public also opposed the additional tax and with good reason. The added excise tax was going to make purchasing an SUV, a popular type of vehicle in Puerto Rico, more expensive. Of course, no one was aware at the time of the government’s fiscal crisis and that budget deficits were building up to the record level they have today reaching an estimated $2 billion. While the excise tax did have an impact on the sales of SUVs, the overall car industry still succeeded in achieving record levels last year with the sale of new passenger cars picking up substantially.

Now the possibility of repealing the excise tax is being publicly debated by the new Puerto Rico Legislature, a move that, if approved, would only contribute further to the Commonwealth’s fiscal crisis. The government’s fiscal crisis is the primary reason Gov. Aníbal Acevedo Vilá isn’t expected to support the repeal of this latest excise tax.

The fact is, since the excise tax has not hurt overall automobile sales in Puerto Rico and recognizing Hacienda’s dire need for revenues, the tax should not be repealed.

The designated secretary of Hacienda, Juan Carlos Méndez, informed a legislative committee in January that eliminating the excise tax imposed by the Calderón administration would mean the Treasury would receive $90 million less a year. This would only lead to greater deficits during the next fiscal year.

As a result, legislative leaders must publicly state without delay if they plan to repeal the excise tax on SUVs and luxury cars, so customers don’t postpone their decision to purchase a new car while they wait to see if the tax is eliminated. A wait-and-see attitude by consumers could cause more harm to the auto industry than leaving the excise tax in place. Removing the tax now will only hurt the government, which is already experiencing a fiscal crisis.

The Commonwealth government and legislative leaders need to move fast and announce what they plan to do with the auto excise tax. If the government’s plan is to repeal the excise tax system entirely, replacing it with a sales or value added tax, or if it seeks to simply eliminate the added tax on SUVs, it must say so soon. A replacement of the excise tax system with one that is more equitable is certainly needed, but the government must take swift action. Further delaying the decision will only hurt the island’s auto dealers as customers wait to see if the excise taxes are revoked and the prices on SUVs reduced.

We recognize both major political parties promised to roll back the excise tax on SUVs during the 2004 campaign. But the reality is that no one could have imagined the fiscal crises that would emerge, making it impossible for the Commonwealth to operate with $90 million less in revenue. The way things are now, every penny counts. The Legislature should explain to the public why it will not repeal the tax as soon as possible. The public will understand. It should be a bipartisan announcement. It’s the correct decision for Puerto Rico’s economic health.

This Caribbean Business article appears courtesy of Casiano Communications.
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