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More taxes on the horizon

Commonwealth prepared to impose $3.48 billion in new taxes & service charges


June 23, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

If Gov. Aníbal Acevedo Vilá’s proposed budget were approved without any changes by the Legislature, taxpayers would face $3.48 billion in tax and service-rate increases over the next three years, on top of the $1.43 billion in increases passed during Gov. Sila Calderón’s administration. Combined, both administrations would cost taxpayers and consumers $4.91 billion in added taxes and service charges in just eight years.

Calderón’s fiscal plan failed

It is said hindsight is 20/20. If that is true, looking back on the Calderón administration’s tax and spending increases can be quite an experience. During a period when governors from Florida, Massachusetts, Maryland, Virginia, Illinois, and Connecticut proposed budgets with billion-dollar across-the-board cutbacks in government programs, hiring freezes, and travel restrictions, Calderón proposed a 6.4% increase to the 2003 fiscal consolidated budget of $1.2 billion. That same proposal included a 5% increase, or $374 million, to the general fund.

To finance the increased spending, the governor needed to raise nearly $600 million in revenue. The result was increases in numerous taxes in 2002, including the excise taxes on tobacco products, alcoholic beverages, and certain vehicles. Calderón proposed increasing the tax on a pack of cigarettes by 50 cents, and a bottle of alcoholic beverage by 15 cents to collect $200 million in additional government revenue. She also proposed increasing tax rates on sport utility vehicles (SUVs) from 15% to 24% to collect another $70 million in tax revenue. Calderón postponed the promised 1% reduction in individual income tax rates to add another $116 million to the government’s coffers.

The same year the tax increases were approved, excise taxes increased 12%, going from $1.47 billion to $1.65 billion in 2003. Year-to-year organic growth of tax payments, without altering any rates, is estimated to be only 5%. Excise taxes paid for vehicles jumped 19%, from $418 million in 2002 to $499.3 million in 2003. Taxes paid for alcoholic beverages increased 20%, from $249.7 million in 2002 to $299.6 million in 2003. For tobacco products, excise taxes increased almost 30% during the same period, jumping from $116 million to $149.5 million.

A study prepared by the House Financial Affairs & Treasury Committee, of which Rep. Antonio Silva serves as chairman, points out these tax and rate increases cost consumers $1.4 billion during the Calderón administration. Those increases included $423 million from taxes on alcoholic beverages, cigarettes, and tobacco; $210 million from luxury vehicles and SUVs; as well as $18 million on inventories of vehicles, beverages, cigarettes, and tobacco.

The additional taxes imposed by the Calderón administration also included $360 million from the reinstatement of the "marriage penalty" tax and $330 million from the elimination of tax cuts granted by the Rosselló administration. Another $60 million in taxes was added by imposing an obligatory 3% and 7% retention on services provided by corporations, service associations, and individuals, and another $30 million from a 10% tax on casino jackpots. Calderón also invested more than $4 million in a study of overall tax reform that didn’t occur during her four-year term, and has yet to take place.

At the time (CB Feb. 21, 2002), Calderón explained "…she opted for the tax increases and special measures as the least painful way of balancing the budget, having rejected other options, including seeking new financing or another round of sharp spending cuts. She also said the tax measures are necessary to close what the administration has termed a recurring structural deficit since 1997."

The government’s present $1.7 billion structural deficit, massive payroll–which ties up more than 60% of the general fund–the recent credit downgrade on general obligation bonds (GOs), as well as the tax reform that never happened, seem to indicate Calderón’s fiscal plan failed.

More taxes on the way

The Acevedo Vilá administration is attempting to implement many of the same measures as his predecessor. Consumers face higher prices for energy, water, transportation, cars, taxes, tolls, and other items. The House Financial Affairs & Treasury Committee study shows the governor’s budget proposal includes $3.48 billion in new tax increases between the 2006 and 2009 fiscal years.

Consumers would pay an additional $1.28 billion through the elimination of exemptions to the excise tax, including those for food and medicine, which could result in higher health-plan costs and an 18% increase for food. The banking sector would have to pay $360 million in extra taxes, which also could be passed on to consumers through higher prices.

The proposed 20% tax rate on capital gains, a 100% increase over the present 10% rate, would bring in $120 million in additional tax revenue. Another $120 million in taxes would be collected through increases for marbetes (registration fees) on luxury vehicles. The biggest impact on consumers would be from the permanent elimination of the Aqueduct & Sewer Authority’s $400 million annual government subsidy which, according to the study, would mean consumers would pay $1.6 billion in additional charges for water service through fiscal 2009. Not only would they be paying more, but the sudden elimination of the subsidy could affect services as the public corporation makes the necessary budgetary adjustments.

Resolving the island’s fiscal problems through tax increases and higher utility rates means money continues to be taken from consumers’ pockets to pay the government. As the government continues to get bigger, bureaucracy becomes a restraint rather than a support for citizens and the economy. Instead of facilitating processes and improving services, the tax revenue has been used to feed the government, helping it grow even more. Bigger government reduces productivity and drives up operational costs. This represents a dangerous cycle that puts the brakes on the economy and may put investors’ confidence at risk. Credit-rating agencies’ confidence already has been tarnished and is reflected in the downgrade of the Commonwealth’s GO bonds in May.

This Caribbean Business article appears courtesy of Casiano Communications.
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