Job Cuts, Tax Hikes And An End To Subsidies

by John Marino

March 18, 2005
Copyright © 2005 THE PUERTO RICO HERALD. All Rights Reserved.

. Gov. Acevedo Vilá pulled no punches in discussing the dire state of government finances during this week's budget address, in which he outlined a slew of new tax initiatives, government job cuts and other moves to try to balance government books.

Saying the current budget deficit could hit $1.7 billion before the fiscal year ends on June 30, the governor pledged to stop taking out loans or using one-time expenditures to pay for government expenditures.

Opposition lawmakers who control the Legislature immediately pledged to work with the administration in trying to bring financial sobriety to the central government, as well as to stand watch over administration expenditures and spending priorities -- a truly healthy response to the budget message.

Less constructive was the knee-jerk criticism of unpopular but sensible measures Acevedo Vilá outlined, such as ending government subsidies to its troubled water utility and eliminating more than 5,000 central government jobs belonging to "contract" or "irregular" employees.

These employees, nonetheless, contribute to the commonwealth employee head count of 241,400 in 144 government agencies and public corporations, with a $7.7 billion annual payroll, according to administration officials.

Acevedo Vilá deserves credit for delivering a cohesive, serious budget proposal, which includes several measures destined to be unpopular. There's certainly plenty to question in it, but its main points chart out initial steps to confront the big problem of the commonwealth budget.

The proposal envisions a consolidated 2006 budget of $25.66 billion, an increase from last year‚s $24.65 billion. The general fund, consisting of commonwealth funds, would be $9.68 billion, $1.23 billion above last year's budget.

Acevedo Vilá justifies the increase, saying it goes to paying this year's deficit, but House Speaker José Aponte went on record in introducing the governor as saying that next year's budget should be no larger than the current one.

The most important aspect of the address might have been the moves it proposes to cut down on the size of the bloated commonwealth bureaucracy. Besides the 5,233 job cuts, Acevedo Vilá offered a $2,000 retirement bonus to government employees with the maximum 30 years of service to retire. Another incentive would offer the full maximum retirement benefits to workers with from 25 to 30 years of service. Some 18,091 public employees qualify for the program.

The consolidation of 18 government agencies is also a positive step, but the changes affect mostly marginal government agencies with minuscule budgets. Some of the larger government agencies, like Police, Health and Education, get healthy increases, but there's no sign of great administrative changes at work.

More constructive was the governor's pledge to end subsidies to public corporations, such as that to the troubled Aqueduct and Sewer Authority, which has been receiving $400 million annually from the Treasury and Government Development Bank. Acevedo Vilá rightly painted the subsidies as "double taxation" for your average wage earner. But without them, the cost of water service will undoubtedly go up.

The new chief executive also presented bold new tax initiatives, as likely to tick off the middle class as they are to the smaller but more powerful upper class. He said he wanted them to take effect for two years, until a comprehensive tax and fiscal reform could be enacted. The timing aspect is a wise move, as revamping the tax system without impacting revenues would take at least that long.

Acevedo Vilá proposed legislation to eliminate the 35 exemptions, many of them on basic necessities like diapers, clothing, medicine and food, to the general 6.6 percent excise tax, for an estimated $639 million in additional government income. The proposal could be a necessary move to ensure government financial stability, but that assumption needs to be tested in front of New Progressive Party-led legislative hearings on the budget.

For sure, it kicks the legs from underneath the argument Acevedo Vilá has made against the imposition of a consumption tax as regressive, hurting the working class and poor more than higher wage earners. If a consumption tax is any more regressive than the current excise tax, it's only because of the many exemptions to it.

Economists have long argued that the tax impact would be less on the consumer if the tax were levied at the end of the distribution chain, as with a sales tax, rather than at the beginning, as with the current 6.6 percent tax. And sales tax proponents have always discussed the proposal as a substitute for the excise tax.

The business community is likely to be suspect of a proposal to increase tax rates for banks, and enact a uniform 20 percent capital gains tax, which currently ranges from 5 percent to 25 percent. The governor is also looking to make an additional $30 million annually by increasing the cost of vehicle registrations on luxury cars.

There's been plenty of criticism of the plan by NPP lawmakers who control the Capitol. Some argue the spending cuts don't go far enough, while others are criticizing the choices Acevedo Vilá has made -- such as eliminating the excise tax exemptions on basic necessities.

The chatter over the budget has been good. Especially since NPP lawmakers will have a better than usual opportunity to affect budget policy since they control the Legislature.

Now that a compromise status bill appears to be nearing tri-partisan agreement, the debate on the budget can finally begin.

John Marino, Managing 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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