AAV Tax Plan Promises More Pain Than Gain

by John Marino

March 25, 2005
Copyright © 2005 THE PUERTO RICO HERALD. All Rights Reserved.

. Behind in the polls during the race for La Fortaleza, a few weeks before Election Day, Aníbal Acevedo Vilá seized on an issue he thought might push him into the lead -- New Progressive Party support of a sales tax. In hindsight, it was a shrewd political move that undoubtedly helped him get enough votes to squeak into La Fortaleza. But his tirade against the sales tax might yet come back to haunt him.

Acevedo Vilá charged that NPP gubernatorial candidate Pedro Rosselló‚s support of a sales tax would "punish" the middle class. He discussed the issue as if it were a Rosselló proposal. "I would not push for a tax that punishes the poor and middle class," he said, adding that it would be a tax on "everything you consume."

But a few months later, during his first budget address, Gov. Acevedo Vilá delivered a tax proposal that is undoubtedly more regressive than any state sales tax across the nation. Citing the government’s financial crunch, Acevedo Vilá proposed an across-the-board lifting of the 35 exemptions to the general excise tax. He‚s calling for a two-year lifting of the exemptions, enough time, he said, to institute a complete tax reform.

The temporary measure, however, would hit consumers hard, especially the poor and middle-class, and worse, would probably undercut government aims to improve island education and healthcare. That’s because those exemptions are on such basic necessities as food, children’s clothing and diapers, as well as on medical and educational products.

Among economists, public policy officials, and increasingly, government officials, there is growing consensus that a consumption tax is the best way to increase government revenues and ease the burden on the salaried wage worker in Puerto Rico, who carries the biggest tax burden.

Excise taxes, applied at the beginning of the distribution chain, inflate the impact of the tax on the consumer much more than sales taxes applied at the end of that chain, most experts say. The current 6.6 percent excise tax inflates costs by as much as 18 percent, economists recently told lawmakers.

Candidate Acevedo Vilá never did say that sales tax proponents supported the idea as a way to replace the excise tax. Or that it wasn’t just the NPP that was supporting it. During the last term, the Popular Democratic Party-controlled Legislature held hearings on a tax reform that embraced the imposition of a consumption tax as part of a larger overhaul. The Calderón administration commissioned an expensive study on the issue, which examined a sales tax as one alternative. Last year, Gov. Calderón said the next governor would be "morally obligated" to follow the recommendations of a $4 million study she commissioned, which calls for the imposition of a consumption tax, a mixed vale-added and sales tax scenario.

Besides the inflationary impact, there are also practical reasons to end the excise tax on imported and manufactured goods. Rules regarding the handling of U.S. mail make it extremely difficult for the commonwealth to collect on goods sent via the U.S. postal service to the island. And air courier companies have successfully fought commonwealth requests to collect taxes on its behalf on merchandise they send into the island. Federal rules regarding interstate commerce could quickly render obsolete the ability of the commonwealth to collect on an excise tax in many instances.

It’s true that a transition to a sales tax will take years, and the government needs both long term and short term solutions. But the proposal Acevedo Vilá sent to the Legislature would do specifically what he accused the NPP plan of doing ˆ hitting those most in need the hardest.

There are good reasons why the commonwealth and most states exempt food, medical products, educational materials and other publications from taxes. It would likely cost the government money in other areas, and undercut aims to improve the health and education of the general public. They would also undoubtedly harm the business climate in certain industries, possibly negating the expected gains in revenue.

The proposed exemptions could be particularly troubling for the island publishing industry, with books, magazines and newspapers being taxed for the first time. Book and magazine distributors say they will be forced to cut back on the number of titles they import, and the proposal would drive up costs for newspapers and magazines.

There is much to cheer in the governor’s budget proposal. Eliminating more that than 5,000 government employees, implementing government retirement plans and ending subsidies to public corporations shows the administration intends to at least begin to attack the bloated commonwealth bureaucracy. And a review of the excise tax exemptions should be a part of that plan.

But a blanket lifting of them would harm not help most taxpayers, would probably not raise as much revenue as the administration reckons and would damper the island’s economic climate and its vibrant media landscape.

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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