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Reuters News

Acevedo Vila Sees Tax Reform A 2-Year Process

By Joan Gralla

13 May 2005
Copyright © 2005 Reuters News Ltd. All rights reserved.

NEW YORK, May 13 (Reuters) - Puerto Rico Gov. Anibal Acevedo-Vila on Friday said it likely will take two years to reform the Commonwealth's current tax system, whose complexity now allows too many residents to escape taxes.

Municipalities have not reappraised property values since 1957, noted William Lockwood, president of the Government Development Bank for Puerto Rico.

As Puerto Rico is struggling with a $1.3 billion budget gap, tax reform and boosting the drug sector of its economy are the commonwealth's two-prong strategy to resolve its budget problems over the long term.

Since the 1970s, Puerto Rico has wooed the drug industry, a strategy that has met with considerable success. By 2003, the island's drug companies produced 42 of the top 100 global drugs and $32 billion of exports, the governor estimated.

Puerto Rico's drug makers have one-third more workers than their rivals in Ireland and twice as many as Singaporean companies, he said.

Acevedo-Vila now aims to give this fast-growing sector another boost by leveraging Puerto Rico's academic centers "to become the global center" for Hispanic genomic data by 2010.

Various nations have gene-mapping projects underway. Puerto Rico's bilingual residents are ideally located to help Latin America and the growing Hispanic population in the United States fight various diseases, such as diabetes, Acevedo-Vila and Lockwood said in an interview with Reuters.

The governor added he now is reviewing his Blue Ribbon Commission's tax reforms, which include special incentives for corporations tied to the number of people they employ.

The tax reforms also include having municipalities reassess property values and raise tax rates, though they could offer lower rates to the elderly and disabled, Lockwood said.

The Commission suggested a new broad-based consumption tax, a hybrid of a sales tax and value added tax. Consumption taxes can fall hardest on poor and middle-income earners, and Acevedo-Vila did not say he would support such a levy.

"My main target is offering real tax relief to the middle class," Acevedo-Vila said, explaining he wants a simpler system,but not one that is regressive.

The tax reforms would also cut mortgage interest deductions to 20 percent of taxable income for high-income earners, to give these individuals less of an incentive for building luxury second homes, Lockwood said. The middle class would only see their deductions fall to 30 percent.

The Commonwealth must close around the $1.3 billion shortfall in the new $9.7 billion budget that starts on July 1. The governor's gap-closing measures include a temporary surtax on financial institutions that will raise $180 million. The tax is expected to end once tax reform is approved.

The legislature, which must approve both the new budget and tax reform, is led by the pro-statehood New Progressive Party.

The governor, whose party favors more autonomy from the United States, also wants to end the general excise tax's exemptions for food, medicine and other categories. That would raise $639 million.

The rest of the gap will be closed with an unexpected nearly $400 million surge in revenue and $300 million of payroll cuts that will be achieved by offering workers a $2,000 bonus to retire.

Some 25 percent of Puerto Rico's workforce have government jobs, and many union contracts expire this year. "I met with labor leaders personally, and I told them we have to fix the finances," Acevedo-Vila said.

"We have to have a balanced budget with no tricks like before," he added, noting that in a first, his budget will consolidate government agencies instead of creating new ones.

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