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Widespread impact of higher taxes


April 21, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

If there is one thing Puerto Rico’s taxpayers, consumers, and businesses can count on by the end of 2005, it’s paying higher taxes and prices for many of the goods, utilities, and services obtained on the island. In his pursuit to collect additional revenues to balance the budget deficit and protect the Commonwealth’s credit rating from further downgrades, Gov. Aníbal Acevedo Vilá, as reported in CARIBBEAN BUSINESS on April 7, 2005, plans to dig into the pockets of taxpayers, consumers, and business with $1.3 billion in added taxes in fiscal 2006.

Local consumers can expect to pay higher prices on imported food, medicine, children’s apparel, books, shoes, banking services, insurance, and a long list of other basic necessity items and services as a result of Gov. Acevedo Vilá’s plans to remove exemptions on the 6.6% excise tax. Increases in the capital gains tax, as well as higher water and electricity rates, highway toll fees, and higher tuition fees at the University of Puerto Rico, among others, are also expected by the end of the year as part of the fiscal 2006 Commonwealth budget.

In his attempt to help solve the Commonwealth’s fiscal crisis, the worse Puerto Rico has faced in decades, the governor also proposes to collect another $360 million in added income tax over the next two years from Puerto Rico’s banking sector, a proposal that sent the Puerto Rico bank stock values on a rapid downslide. In 2004, the island’s banking sector paid $345.2 million in income tax alone, plus an additional $106 million in municipal patents, property taxes, license fees, and other fees for a total of $451 million in local taxes. Now, the industry is bracing itself to pay another $180 million more a year for the next two years in a provisional special new tax.

The special income tax proposed by Gov. Acevedo Vilá represents an increase of more than 50% in income tax to the banks alone compared with the amount the banking sector paid in 2004. Since the governor announced the new tax in March, bank stocks have lost nearly $4 billion in market value, affecting their capacity to raise additional capital and the banks’ ability to grow.

This drop in market stock values has had an economic impact on other sectors of Puerto Rico’s economy as investors often use their stock holdings as collateral for loans on other investments, business expansions, or development projects. With the reduction in their collateral, stockholders are being forced to raise additional capital to cover the required guarantees on their loans.

The island’s banking sector, which has been the bright spot of Puerto Rico’s economy over the past several years, is being penalized with a special tax by the new Commonwealth administration for simply having done well. While executives in the island’s banking sector agree they should pay their fair share to keep the government running, the industry is requesting that other sectors share the burden equally and that what is portrayed by the administration as a provisional tax runs the risk of becoming a permanent burden unless the Commonwealth gets its spending under control.

While Puerto Rico’s taxpayers and businesses understand the governor’s need to collect revenues to keep operating after the deficit he was left with from the last administration, the problem is these higher taxes are not being invested in capital improvement or infrastructure projects, which help keep the economy moving. Instead, the Acevedo Vilá administration is reducing investment in infrastructure projects by 10% or by more than $340 million in fiscal 2006. Imposing higher taxes and reducing government spending on capital investment or infrastructure will certainly not contribute to Puerto Rico’s economic growth. When combined with the higher taxes most sectors of the economy will be paying, most will invariably have to be passed on to all consumers.

The first quarter of 2005 has certainly not been a bright one for businesses in Puerto Rico. The economic uncertainties created by the Commonwealth fiscal policies, higher taxes, and spending levels are taking their toll on the local economy. Instead of imposing higher costs on Puerto Rico’s taxpayers, businesses, and consumers, what the Commonwealth really needs to do is reduce its operational costs by reducing its bureaucracy, eliminating outdated agencies, and combining others. Taxing the private sector more never leads to economic growth.

This Caribbean Business article appears courtesy of Casiano Communications.
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